Putting the Success in Succession: How Proposed Amendments Related to Bill C-208 Could Impact Your Family Business Transfer


By Adrienne Adams, St.John McCloskey, Areet Kaila, and Harman Kang

Bill C-208, a private member’s bill that sought to amend the Income Tax Act (the “Act”) to facilitate transfers of family businesses to the next generation, received royal assent on June 29, 2021. Shortly afterwards, however, the Department of Finance (“Finance”) announced plans to further amend the Act due to a concern that the legislative amendments proposed by Bill C-208 had various technical deficiencies and did not contain sufficient protections to ensure the amendments would only be applied in the case of “genuine” intergenerational business transfers.

Finance has attempted to address these concerns through legislative amendments that were first announced in Budget 2023 and which were revised and updated in August 2023 (the “Proposed Amendments”). This article aims to provide clarity on the Proposed Amendments by:

  1. providing a brief background on surplus stripping and how Bill C-208 attempted to facilitate intergenerational business transfers; and
  2. detailing the Proposed Amendments and their potential impacts on family business transfers.

Surplus Stripping and Section 84.1 of the Act

Section 84.1 is an anti-surplus stripping rule that is designed to prevent a taxpayer from extracting the profits of a corporation in a way that converts what would otherwise be a dividend into a capital gain (which is generally taxed more favorably). This anti-avoidance rule can apply where an individual (or trust) transfers shares of a Canadian-resident company (the “target company”) to another company (the “purchaser company”) with which the individual does not deal at arm’s length, and immediately after the transfer the target company is “connected” with the purchaser company. If section 84.1 applies, the proceeds of sale are recharacterized as a deemed dividend, which would preclude the vendor from using the lifetime capital gains deduction in connection with the sale.

Because of section 84.1, a business owner selling their company to an arm’s length party could receive more favorable tax treatment than if they transferred the company to a member of their family.

The Introduction of Bill C-208

Bill C-208 attempted to address the concern that some transfers might not be “genuine” intergenerational transfers by introducing an exception to section 84.1 that applies when the following requirements are met:

  1. The shares to be transferred are qualified small business corporation (“QSBC”) shares or shares of the capital stock of a family farm or fishing corporation (“FFFC”);
  2. The purchaser corporation is controlled by one or more children or grandchildren of the vendor who are 18 years of age or older; and
  3. The purchaser corporation does not dispose of the shares within 60 months of acquiring them.

Proposed Amendments

The Proposed Amendments would limit the types of transfers that qualify for the Bill C-208 exception. The exception would still only apply to the transfer of QSBC or FFFC shares, but would now also need to be structured as either an “immediate intergenerational business transfer” or a “gradual intergenerational business transfer”.

Immediate Intergenerational Business Transfer

The key requirements for an immediate intergenerational business transfer are:

  1. Immediately before the transfer, the vendor, either alone or together with a spouse or common-law partner, (the “Parent”) controls the target company.
  2. At the time of the transfer, the purchaser company is controlled by one or more of the Parent’s children over the age of 18 (the definition of “child” in the proposed amendments is broadened and now includes a niece or nephew).
  3. After the transfer, the Parent does not control the target company or the purchaser company and instead these companies are controlled by the child (or children).
  4. Beginning immediately after the transfer:
    1. The Parent does not own, directly or indirectly, 50% or more of the shares of any class of the company (there is an exception for non-voting preferred shares that meet certain requirements, and it appears that a parent can continue to own these shares indefinitely); and
    2. The child (or at least one member of the group of children) is actively engaged on a regular, continuous and substantial basis in the business.
  5. After three years, the Parent cannot own any such shares, and within that three-year period (or such other time as is reasonable in the circumstances) the Parent must take reasonable steps to transfer “management” of the business to the child or children and permanently cease to manage the business. The new clarification in the Proposed Amendments provides that provision of advice is not “management.”
  6. The Parent and the child (or each member of the group of children) must file a joint election by the applicable due date.

Gradual Intergenerational Business Transfer

The requirements for a gradual intergenerational business transfer are similar to the requirements for the immediate transfer above, with a few key modifications. While the Parent must still give up legal voting control of the target company after the share transfer, they are not required to give up factual control immediately. Instead of a three-year transfer period, the Parent has ten years to transfer the management of the business to the child (or children). The August 2023 updates to the Proposed Amendments clarify that “management” is meant to refer to the direction or supervision of business activities, and not business advice provided by the Parent. The August 2023 updates also clarify that when a group of children is acquiring control, the rules do not require each child within the group to assume a management role.

In addition, for a gradual business transfer, there is also a requirement that within ten years of the transfer the economic value of the Parent’s debt and equity interests in the business be reduced to 30% of the value of their interest at the time of the transfer (or 50% in the case of shares of a FFFC). If the Parent is a beneficiary of a discretionary trust that has an interest in the company, the interest held by the trust may be deemed to be held by the Parent for the purposes of this rule.

Under the Proposed Amendments, the child (or children) will be jointly and severally liable for any additional taxes payable by the Parent in respect of a transfer that does not meet the above conditions. The limitation period for reassessing share sales that occur under the above rules is also extended by three years in the case of immediate transfers, and ten years in the case of gradual transfers.

A taxpayer may only rely on the intergenerational business transfer exception once. A taxpayer completing a successive transfer would not be shielded from the application of section 84.1.

Moving Forward and the Impacts on Family Business Owners

The recent updates to the Proposed Amendments provide additional guidance around the application of section 84.1 to intergenerational business transfers. However, the new rules still contain subjective elements that could create uncertainty in some situations. For example, when would it be reasonable for a transfer to take longer than three years? For a business managed mostly by other employees, can a child still be considered actively engaged in the business? Where is the line between “direction” over business activities and “advice”? Meeting the various conditions for these rules will be difficult in many cases and will require extensive ongoing monitoring of the transition process.

The Proposed Amendments would apply to dispositions of shares that occur on or after January 1, 2024.

If you have any questions around completing an intergenerational business transfer, or are looking for guidance around these types of issues, please reach out to a member of our Business Succession, Private Company Mergers and Acquisitions, Family Office or Tax groups.