Practice National Taxation

New opportunities for intergenerational transfers of businesses after enactment of Canada’s Bill C-208

Any transfer of a family business must be structured correctly to avoid re-assessment by the CRA, says Canadian tax lawyer and accountant David Rotfleisch

Author: David J. Rotfleisch

TORONTO – Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), received Royal Assent and became law in Canada on June 22, 2021. Bill C-208 was a private member’s bill intended to level tax burdens faced by small business owners making intergenerational transfers of shares of an incorporated small business or shares of the capital stock of a family farm or fishing corporation to family members.

Modifications to Dividend Stripping Rules Under Section 84.1

Bill C-208 has amended  dividend stripping rules under section 84.1 the Income Tax Act. Section 84.1 of the Income Tax Act is an anti-avoidance provision that applies where a non-arm's length transfer of shares from a “subject corporation” occurs between a taxpayer and another non-arm's length “purchaser corporation.” In order to prevent the taxpayer from unfairly structuring payment of retained earnings as a capital gain rather than a dividend, subsection 84.1(1) will require the paid-up capital (PUC) of the shares (which is the value of the original contributed capital for those shares issued) in the purchaser corporation be limited to either the paid-up capital of the shares in the subject corporation, or the adjusted cost base (ACB) of the shares in the subject corporation. This effectively requires any capital gain on the subject corporation’s shares beyond the original purchase price to be automatically converted into a deemed dividend in the taxpayer’s hands.

Under the amendments enacted by Bill C-208, a new exception is provided under paragraph 84.1(2)(e) which deems a taxpayer and purchasing corporation to deal at arm’s length and avoid dividend stripping rules where:

  • The subject shares are qualified small business corporation shares or capital stock shares in a family farm/fishing corporation;
  • The purchasing corporation is controlled by one or more of the taxpayer’s children or grandchildren at least 18 years of age; and
  • The purchaser corporation does not dispose of the subject shares within 60 months (5 years) of purchase.

In order to avoid the convenience of family relations as a means to disguise a dividend stripping transaction, subsection 84.1(2.3) has also been amended to require the purchaser corporation hold the subject corporation’s shares for a minimum of 60 consecutive months. If the shares are distributed prematurely, the dividend stripping rules are then deemed to apply. Paragraph 84.1(2)(e) has also limited these rules to smaller family corporations by reducing the capital gains exemption available under subsections 110.6(2) and (2.1) for taxable capital employed in Canada in excess of $10 million.) It also fully eliminates the capital gain exemption where that taxable capital is $15 million or more.

The result is that families can now engage in tax-reduced or tax-free transfers of a family business between parents and children/grandchildren similarly to other third-party transactions, and to avoid unfair tax treatment on genuine transfer arrangements. The Canada Revenue Agency will require an independent assessment of the fair market value of the subject corporation’s shares, however, and an affidavit signed by the taxpayer and a third-party attesting to disposal of the shares, which is a potentially disturbing development since in no other cases does the Income Tax Act require an affidavit from a taxpayer.

Modifications to Capital Gains Stripping Rules Under Subsection 55(2)

Bill C-208 has also amended subsection 55(2) of the Income Tax Act concerning capital gains stripping. Capital gains stripping occurs when a capital gain is stripped from a corporation in the form of a non-taxable intercorporate dividend, in order to obtain beneficial corporate tax treatment. Subsection 55(2) is another anti-avoidance provision that requires a taxable intercorporate dividend received to be re-characterized as a capital gain where that dividend exceeds the “safe income,” or after-tax income contributing to the gain on those shares, of the corporation. Subsection 55(2) provides an exemption from recharacterization of an intercorporate dividend for certain reorganization transactions, by way of a related-party exemption under paragraph 55(3)(a) and the “butterfly” exemption under paragraph 55(3)(b). The related-party exemption is more favourable than the unrelated party “butterfly” exemption because fewer restrictions are placed on what transactions can occur throughout and after the corporate reorganization. Under the previous wording of section 55, siblings were not considered to be “related” for the purposes of these rules.

Bill C-208 has amended subparagraph 55(5)(e)(i) to allow siblings to be recognized as “related” under subsection 55(3) where the dividend in question is received or paid as part of a transaction or even by a corporation whose shares are those of either a:

  • Qualified small business corporation; or
  • A family farm or fishing corporation.

As a consequence, there is now greater flexibility for organizing intergenerational transfers of a family business between siblings. The amendments have also made available to siblings an ability to claim the Lifetime Capital Gains Exemption on those transfers of qualifying shares, which is a major tax planning benefit for owner-managed family businesses.

An investing corporation owning shares in a subject corporation will recognize a gain when disposing of those shares where share value has increased since acquisition. A capital gain attributed to a corporation is subject to corporate income tax rates. However, a dividend received from a taxable Canadian corporation may escape corporate taxation as a tax-free intercorporate dividend.

General Anti-Avoidance Still Applies

It is now easier for families to arrange for transfers of family businesses through to family members, but the amendments made by Bill C-208 have not eliminated the General Anti-Avoidance Rule under section 245 of the Income Tax Act. A family transfer may nevertheless be viewed as avoidance if it was not arranged primarily for a bona fide purpose rather than to obtain a tax benefit. Bill C-208 has not created a new vehicle for fraud or improper tax planning under the Income Tax Act, and it is crucial that any transfer of a family business, farm or fishing corporation be structured correctly to avoid re-assessment by the CRA.

David J Rotfleisch, CPA, JD is the founding tax lawyer of, Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit and email David at

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