Bill C-208 – New tax law eases limitations when selling small businesses, farms, fisheries to children

The lifetime capital gains exemption (LCGE) is one of the key tax planning advantages available to small business owners, farmers, and fishers.  In 2021, it can exempt from tax up to $892,218 of capital gains realized on the sale of shares of a qualified small business corporation and up to $1 million of capital gains realized on the sale of shares of a family farm or fishing corporation.  Until recently, existing legislation 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 LCGE on the sale of those shares. A private member’s bill was introduced in Parliament last year proposing amendments to the Income Tax Act to alleviate these difficulties. Private member’s bills rarely make it through the legislative process.  However, on June 29, 2021, Bill C-208 received Royal Assent, making it the law (but see cautionary note below). 

Prior to the amendments contained in Bill C-208, if a child wished to utilize a corporation to acquire shares from their parents, doing so essentially prevented the parent from utilizing their LCGE.  This was viewed as an unfair restriction, as almost all business sales between unrelated parties are made through a purchaser corporation. Using a corporation to facilitate the purchase of a business significantly reduces the financing costs of the purchaser, as payments are made with after-tax corporate dollars, thereby avoiding or deferring the personal level of tax.  If parents wanted to utilize the LCGE, their child was forced to acquire the shares personally, increasing the after-tax cost of the purchase.  Before the amendments, when a child did use a corporation to purchase shares, if there had been any use of the LCGE to shelter a gain on the shares, past or present, subsection 84.1 of the Income Tax Act, would tax the parents on the portion of the gain sheltered with the LCGE as a taxable dividend. 

The amendments attempt to level the playing field and to alleviate this problem by allowing a sale to non-arm’s length purchasers (i.e. from parent to child) of the shares to result in a capital gain and the ability to use the capital gains exemption to reduce the income tax.

Additionally, Bill C-208 also enacts legislation that deems siblings to be considered non-arm’s length with respect to certain transactions. The intent of this change is to it make it easier to split corporations held by siblings on a tax deferred basis.


A note of caution:

On July 19, 2021, Deputy Prime Minister and Minister of Finance, Chrystia Freeland affirmed that private member’s Bill C-208, which received royal assent on June 29, 2021, is law and is now in effect. However, she also confirmed it is the government’s intention to bring forward amendments to this new legislation to ensure that the law facilitates genuine intergenerational share transfers, but also safeguards against any unintended tax avoidance loopholes that may have been created by the bill (e.g. surplus stripping transactions). The amendments will address certain issues, including:

  • the requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild, and the level of ownership in the corporation that the parent can maintain for a reasonable time after the transfer
  • the requirements and timeline for the parent to transition their involvement in the business to the next generation, and that generation’s level of involvement after the transfer

The draft legislative amendments will be subject to consultation, and the final amendments will be introduced in a parliamentary bill that will apply the later of November 1, 2021 or the date of publication of the final draft legislation.