Bill C-208: Transferring your company to your kids just got easier

Tax circles have been buzzing over the recent changes to the Income Tax Act relating to Bill C-208 which aims to put private company share sales to children and grandchildren on level footing with private company share sales to external third parties. Prior to these changes, certain private company owners would have to sell their company’s shares to non-family members to realize their Lifetime Capital Gains Exemption (“LCGE”) – which could amount to significant tax savings depending on the type of company being sold:

• Up to ~$212,000 in tax saved on Qualified Small Business Corporation Shares (“QSBC” AB 2020);
• Up to ~$240,000 in taxed saved on Family Fishing or Farming Corporate (“FFFC” AB 2020)

These tax savings are “per-person” and could be multiplied depending on the ownership structure. In addition to being precluded from claiming their LCGE, the ‘capital gain’ that would typically arise on the sale of shares may have been re-characterized as a dividend to the seller. At the time of writing this, dividends attract higher personal tax than capital gains so this re-characterization could have the impact of triggering an additional 7%-18% (AB – 2020) tax on the disposition of the shares to their children and grandchildren vs. unrelated third parties. For years, certain farmers, fisher-folk and other private company owners had to make a very hard decision between selling to their children or grandchildren (i.e. very personal “legacy” concerns) vs. saving a LOT of tax on the sale of their business.

Bill C-208 aims to create equity between those two options by allowing an owner of certain private companies, fisheries, or farms to sell to their children AND realize the above noted tax benefits on the sale.

There are some interesting nuances to be aware of:

• The shares being sold need to qualify as QSBC or FFFC shares prior to sale. These requirements are detailed and could tie up several blogs, so we won’t get into those requirements here. If you’d like to dig deeper into what this means, feel free to reach out to us for more details.
• The child or grandchild must hold the purchased shares for a minimum of 60 months.

Bill C-208 received Royal Assent on Jun 29, 2021. It has now been passed into law in its current form.

Parliamentary DRAMA.

While the aims of the bill seem noble, the drafting left much to be desired. The drafting didn’t contemplate several scenarios where the bill could be used to create ‘Surplus Stripping’ opportunities. Surplus Stripping is a method of distributing retained earnings of a company to its shareholders at capital gains tax rates (lower) instead of dividend tax rates (higher). Compound this with the ability for owners to now claim Lifetime Capital Gains Exemptions without selling their business outside their family (under certain circumstances), and it becomes obvious that there are some holes to be plugged.

We are very surprised that parliament let this through without addressing these scenarios, but not surprised that the government has recently announced their intention to introduce ‘prospective’ amendments in the near future (November 1, 2021 is indicated in the release), including:

• “The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
• The level of ownership in the corporation carrying on the business 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
• The level of involvement of the child or grandchild in the business after the transfer.”

Reference: GOC July 19, 2021 news release.

Note: On June 30, 2021, the government published a silly announcement where they confusingly indicated that Bill C-208 would be amended at some point in the future and gave, basically, no other details. This announcement caused some stir in tax circles as it left open the possibility of retroactive amendments meaning that the law which had just been passed was, essentially, not law. Shortly after, the minister of finance (rightly) recognized that this isn’t the way our parliamentary process works and “clarified” the confusing announcement in their July 19, 2021 announcement.

If you have any questions about how Bill C-208 impacts your business, or your family, please don’t hesitate to reach out to us today.