The following is a summary of the two primary amendments made to the ITA that are now law.
Section 84.1 of the ITA made it difficult for children to use a corporation to buy shares of a small business, family farm, or fishing corporation from their parents, when their parents wanted to claim the lifetime capital gains exemption on the sale of shares. Parents selling the shares to an arm's length (unrelated) corporation were able to use the capital gains exemption to reduce the income tax on the resulting capital gain on the transaction. However, if the shares were sold to a non-arm's length (related) corporation, such as a corporation owned by the parent's children, for cash or a promissory note, the parents would not have a capital gain and could not use the capital gains exemption. This could result in significant income tax consequences.
The new rules attempt to level the playing field and to alleviate this problem by allowing a sale to non-arm's length purchasers of the shares to result in a capital gain and the ability to use the capital gains exemption to reduce the income tax.
The new rules will require that the purchaser corporation is controlled by one or more children or grandchildren, aged 18 or older, of the vendor and the purchaser corporation does not dispose of the purchased shares within 60 months of the purchase. An independent assessment of the fair market value of the shares must be provided to the Canada Revenue Agency, together with an affidavit signed by the vendor and a third party attesting to the disposal of the shares.
The changes also include a rule intended to reduce the vendor's ability to claim the lifetime capital gains exemption on the sale of shares if the company being sold has taxable capital employed in Canada exceeding $10 million, calculated on an associated group basis (with the ability to claim the capital gains exemption being completely eliminated once taxable capital exceeds $15 million). This is an attempt to ensure the relief only applies to small businesses. However, the reduction to the capital gains exemption may not be effective due to concerns with the language used in the legislation.
Section 55 is a rule in the ITA that prevents the conversion of what would be taxable capital gain into a tax-free intercorporate dividend. Relief is allowed for certain corporate reorganizations that assist in the transition of business or family farm or fishing assets between family members. This relief was not allowed for transactions that involved siblings as they were deemed not to be related for purpose of these rules.
Bill C-208 allows for siblings to be related for purposes of these rules. This should allow certain corporate reorganizations involving shareholders who are siblings to be accomplished more easily.
Summary
The passing of Bill C-208 as law provides an opportunity for genuine intergenerational transfers of shares of small businesses or family farm and fishing corporations until at least November1, 2021. However, it is unclear of the consequences of using these provisions for other tax planning purposes, as these types of transactions are not consistent with the intent of Bill C-208.
Want to learn more about Bill C-208? Our team shares their views in the media:
- The Globe and Mail spoke with BDO Partner Dustin Mansfield
- The Western Producer spoke with BDO Tax Partner Dustin Mansfield
- Atlantic Business spoke with BDO Tax Partner Jennifer Dunn.
- Saltwire spoke with BDO Tax Partner Jennifer Dunn.
The information in this publication is current as of July 27, 2021.
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