Bill C-208 Receives Royal Assent and Becomes Law

On June 29, 2021 Bill C-208, a private members bill, received royal assent and has become law. Bill C-208 modifies the Income Tax Act (Canada) (“ITA”) to allow transfers of businesses between family members to occur on a more tax neutral basis than before. It does this in two distinct ways. First, the bill amends section 55 of the ITA to allow sibling’s to split up an active business in a tax-deferred manner. Second, the bill amends section 84.1 of the ITA to allow a parent to sell shares of their business to a company controlled by their adult children and claim the capital gains exemption. On June 30, the Department of Finance indicated that they would propose legislation to postpone the effective date of the provisions becoming law until January 1, 2022. However on July 19, the department revised the previous news release to indicate that the provisions will be effective June 29, and that amendments would be proposed with an effective date no earlier than November 30, 2021. As a result business owners can rely on the bill as passed in planning their business transition.

Amendment to section 55

Section 55 of the ITA converts transactions that would otherwise be tax-free intercorporate dividends into capital gains, in certain circumstances. In general, when a company is paying an intercompany tax-free dividend on a share in excess of the after-tax earnings of the corporation allocated to the share the dividend will be recharacterized as a capital gain. This general rule is subject to a few key exceptions, one of these exceptions allows for reorganizations of companies within a related group. However for the purposes of these rules, siblings are “deemed” to not be related to one another.

The bill provides an exception to the deeming rule in situations where shares of the corporations involved in the transaction are qualified small business corporation shares or a share of the capital stock of a family farm or fishing corporation. As a result, siblings would not be deemed to be unrelated to one another for the provision, thereby allowing them to take advantage of the related party exception to the rules of section 55 of the Income Tax Act.

The change to the law would be of great benefit in a situation where two brothers own a family farm. One of the siblings would like to continue the farm and the other sibling is less interested in active farming, and would prefer to rent-out corporately owned farmland. In the past it would be extremely difficult and potentially risky to attempt a series of transactions to allow the assets to be split up without triggering a capital gain on the appreciation of the farm assets.

Amendment to section 84.1

Section 84.1 of the ITA converts transactions that would otherwise be tax-free capital gains to individuals into taxable dividends in certain circumstances. In general, when an individual sells shares of a company to another company that is controlled by the individual (or anyone related to the individual) the gain on the transaction is recharacterized as a dividend. One of the main exceptions from the application of 84.1 is if the shares are sold to an arm’s length company. In practice this means that parents can more efficiently transfer their business to outside parties then they are able to transfer the business to their children.

The bill deems a sale of shares that are eligible for the capital gains exemption from a parent to a company controlled by the children to be at arm’s length, and therefore not subject to 84.1, provided certain conditions are satisfied. The conditions to be satisfied are that the shares are generally eligible for the capital gains exemption, the purchaser corporation is controlled by one or more children or grandchildren of the parent each of whom are 18 years of age or older, the purchaser corporation does not sell the shares within 60 months of their purchase, and the taxpayer provide the CRA with documentation in relation to the transfer.

There does not seem to be a requirement that the vendor of the shares is no longer involved in the business or that the child becomes involved in the business.

If this new provision is properly utilized it can allow a business owner to receive after-tax cash from the sale of shares to the child, and the child’s purchase could be financed from the underlying business (so the child doesn’t require any funds of their own).


This bill is amending two of the most complicated and important provisions for small businesses in the ITA. Overall, restructuring transactions within a family will be made easier as a result of Bill C-208 becoming law.

BBLLP would be happy to discuss how Bill C-208 could impact your business succession planning. Please reach out to your engagement team or contact us if you have any further questions.