Passing of Bill C-208 Set to Boost Intergenerational Transfers
After being granted Royal Assent on June 29, 2021, Bill C-208 has successfully amended the Income Tax Act (ITA), facilitating various types of intergenerational transfers as long as they meet certain criteria. With succession having been a long-standing issue, the passing of this new bill makes it easier for select family businesses to get similar tax benefits as businesses that are sold to a third party. It also prevents tax avoidance, potentially providing more equity to the Canadian tax system.
Though the amendments won’t be effective until the start of 2022, this is welcoming news for people hoping to leave their family businesses with their children and loved ones. Global Solutions West is aware of this bill and has outlined the particulars to help you better understand the legislation.
What is Bill C-208?
Bill C-208 is a tentative tax bill that will allow for an easier transition of intergenerational transfers, particularly for family businesses. The goal of the bill is to make it easier for parents to pass down their businesses to their children while also allowing for a fair distribution of a family business’ assets among siblings.
Before the proposal of Bill C-208, an anti-avoidance rule long existed within the Income Tax Act that branded intergenerational business transfers as dividends instead of capital gains. The rule is located in section 84.1 of the Income Tax Act, causing disadvantages for tax-paying family members seeking to offload their businesses when they’re retiring or simply don’t have any more interest in heading day-to-day operations anymore. The newly introduced Bill C-208 provides a lifetime capital gains exemption for people looking to transfer control of their businesses within their families, easing some of the long-standing tax burdens faced involving intergenerational transfers.
The caveat, however, is that the bill won’t come into effect until January 1, 2022, due to an announcement by the Department of Finance. Additional changes to the legislation are expected to address any concerns regarding its wording.
How Will Bill C-208 Benefit Families?
How will Bill C-208 affect taxes on intergenerational transfers?
Bill C-208 will approve intergenerational transfers that meet a variety of conditions:
Any shares owned by a parent that are being transferred should be shares that are part of a Qualified Small Business Corporation (QSBC). The shares can also be from a family-owned farm or a fishing corporation.
Any corporation purchasing shares controlled by children or grandchildren of the parents who own the business, as long as the children/grandchildren are 18 years or older.
Any purchasing corporation that doesn’t get rid of shares within five years of acquiring them. This applies for any reason other than death.
The passing of Bill C-208 and the pending tax amendments that it’s set to trigger are welcome signs for families trying to optimize the succession process. But, there are a few limitations that could prevent some families from accessing these new benefits.
For one, there is a provision within the new bill stating that there will be reduced access to the capital gains exemption whenever the taxable capital in Canada passes the $10 million mark. If taxable capital passes the $15 million mark, access is fully denied. For capital-intensive family businesses, this is troubling news, putting a cap on the benefits they can enjoy from Bill C-208.
Another concerning part of the new legislation for some is that taxpayers have to provide the Canada Revenue Agency (CRA) with independent assessments detailing subject shares and their fair market value (FMV). Taxpayers must also produce a signed affidavit. The affidavit should also be signed by third-party attesting share disposal. Details have yet to be released regarding the qualifications and guidelines for an independent assessment and how the attestation will look.
Why Bill C-208 Helps Siblings
Another standout aspect of Bill C-208 is how it benefits siblings looking to acquire shares of a family business. There’s a rule in the Income Tax Act deeming that, in select circumstances, a tax-free intercorporate dividend will be converted into a taxable capital gain. Under those provisions, located in paragraph 55(5)(e) of the Income Tax Act, asset division from a family business proved to be costly and complex for siblings. They aren’t considered related as dictated by the provisions.
Thanks to Bill C-208, the carve-out of a family member’s brothers and sisters is removed, establishing more consistency within the Income Tax Act. Siblings are treated as relatives under the revised provisions. The deeming rules do not apply when an intercorporate dividend has been paid, or as part of a transaction or an array of transactions.
As a result, divisions of family businesses between siblings will be less taxing and complex thanks to the expansive language considering people who qualify for the related party exception. Reorganization involving brothers and sisters has more clarity with the upcoming amendments.
What This Means For Intergenerational Transfers Going Forward
The passing of this new bill eases stress with succession negotiations
The passing of Bill C-208 is groundbreaking for families trying to solidify succession plans with future generations of their families. More understanding and clarity are needed to outline how these amendments will work when put into practice. But, the new rules make intergenerational transfers less costly to complete and allows more family members to enjoy their benefits.
You should have a word with your tax advisor about what Bill C-208 means for your circumstance if you’re considering an intergenerational transfer of an active business or corporation you have in Canada. This also applies if you are reorganizing an active business in Canada through a corporation that includes your brothers or sisters.
In the lead-up to when the new amendments will officially take place, Global Solutions West can help get a clearer understanding of what this means for you and your family. The passing of C-208 and added clarity about the legislation should help ease your worry about how your business assets will be allocated, securing your family’s future in the process. Contact Global Solutions West for more information on Bill C-208 and intergenerational transfers.