A private member's bill that proposes changes to facilitate intergenerational transfers of certain shares passed third reading in the House of Commons on May 12, 2021. Although it's currently uncertain whether this bill will eventually be enacted into law, Bill C-208 proposes exceptions to certain surplus extraction rules that may otherwise apply to certain transfers. These rules may apply when qualified small business corporation shares and family farm or fishing corporation shares are transferred to family members rather than third parties. In addition, the bill provides greater flexibility for the restructuring of family businesses that involve siblings.

While it is unusual to see a private member's bill that includes tax legislation, Bill C-208 is currently headed to the Senate for further review after all three opposition parties voted in its favour. Note that the future progress of this legislation is still uncertain, including any potential application date, as the changes in the bill are likely to only become effective on the day the bill potentially receives Royal Assent.


Section 84.1 ­— Non-arm's length sale of shares

Section 84.1 is a provision intended to prevent taxpayers from using a non-arm's length sale of shares to extract surplus in a corporation. This rule can apply where a taxpayer (other than a corporation) resident in Canada disposes of shares that are capital property of the taxpayer (subject shares) of a Canadian-resident corporation (subject corporation) to another corporation (purchaser corporation) with which the taxpayer does not deal at arm's length, and immediately after the transfer, the subject corporation is connected with the purchaser corporation. In this situation, the following rules apply under section 84.1:

  • Where the purchaser corporation issues shares in consideration for the subject shares, the increase in paid up capital (PUC) of the issued purchaser corporation is limited to the greater of PUC and adjusted cost base (ACB) of the subject shares (paragraph 84.1(1)(a))
  • Where the taxpayer receives non-share consideration (e.g. cash or debt), the purchaser corporation is deemed to have paid a dividend to the taxpayer equal to the fair market value (FMV) of the non-share consideration less the greater of the PUC and ACB of the subject shares (paragraph 84.1(1)(b)).

The ACB of the subject shares for these purposes includes only "hard ACB", which excludes any amounts arising from V-Day value or from a non-arm's length acquisition where the vendor used their capital gains exemption to shelter the gain (under paragraph 84.1(2)(a.1)).

Section 55 – Recharacterization of dividends as capital gains

Generally, subsection 55(2) may re-characterize a taxable intercorporate dividend received as a capital gain for the dividend recipient where the dividend exceeds the safe income contributing to the capital gain on the share on which the dividend is received.

In certain reorganization transactions, an exception to subsection 55(2) may be available if the conditions of the "related party exception" under paragraph 55(3)(a) or the "butterfly exception" under paragraph 55(3)(b) are satisfied. The butterfly exception generally requires the distribution of various types of corporate assets on a strict pro rata basis.

For intergenerational transfers involving siblings, it is often difficult to rely on the related party exception because siblings are deemed not to be related for purposes of section 55 (under subparagraph 55(5)(e)(i)).

Proposed changes included in Bill C-208

Bill C-208 provides new exceptions to sections 84.1 and 55 to allow for the restructuring of family businesses involving siblings and transfers of family businesses to the next generation. As the legislation in Bill C-208 does not have an effective date, it would likely only be effective on the day it potentially receives Royal Assent.

Changes to section 84.1

This proposed legislation was drafted in response to comments that section 84.1 is overly broad and may trigger a deemed dividend in cases of bona fide sales to non-arm's length persons. For example, the rule could be triggered where a taxpayer who wishes to retire from a wholly-owned small business corporation sells shares of the corporation to a corporation controlled by their children.

To address this issue, the bill proposes several amendments to section 84.1. The proposed legislation adds a new paragraph 84.1(2)(e), which deems the taxpayer and the purchaser corporation as dealing at arm's length if the following conditions are met:

  • The subject shares are qualified small business corporation shares or capital stock shares of a family farm or fishing corporation (as defined in subsection 110.6(1))
  • The purchaser corporation is controlled by one or more of the taxpayer's children or grandchildren who are 18 years of age or older
  • The purchaser corporation does not dispose of the subject shares within 60 months of their purchase.

The proposed legislation also introduces a new subsection 84.1(2.3), which applies for purposes of paragraph 84.1(2)(e). Under these rules, if the purchaser corporation disposes of the subject shares within 60 months of their purchase (for a reason other than death), paragraph 84.1(2)(e) is deemed never to have applied. In addition, the taxpayer is deemed to have disposed of the subject shares to the person who acquired them from the purchaser corporation, for purposes of section 84.1.

Under this provision, the 60-month period is deemed to start when the taxpayer disposes of the subject shares to the purchaser corporation. The proposed legislation does not specify whose death would invoke the exception to the 60-month period rule.

In addition, Bill C-208 reduces the capital gains exemption available under subsection 110.6(2) or (2.1) for a particular taxation year on a straight-line basis for taxable capital employed in Canada in excess of $10 million, specifically for the purposes of paragraph 84.1(2)(e). This proposed legislation eliminates the capital gains exemption where taxable capital is $15 million or more. Taxable capital is calculated based on the prior year or current year for this purpose, depending on the circumstances.

These proposals also require a taxpayer to provide the CRA with an independent assessment of the subject shares' FMV, and an affidavit signed by both the taxpayer and a third party attesting to the disposal of the shares.

Changes to section 55

The bill also proposes to amend subparagraph 55(5)(e)(i) to provide an exception to the general rule that siblings are deemed not to be related for purposes of section 55 in certain circumstances. In particular, the amendment provides that the deeming rule does not apply where the dividend was received or paid, as part of a transaction or event (or series of transactions or events), by a corporation whose share is:

  • A qualified small business corporation share, or
  • A share of a family farm or fishing corporation within the meaning of subsection 110.6(1).

This amendment provides greater flexibility for intergenerational transfers involving siblings, as they would potentially qualify for the related party exception, under paragraph 55(3)(a).

Next steps

Now that Bill C-208 has passed third reading in the House of Commons, it must now be considered by the Senate. Before it potentially receives Royal Assent, the bill must pass three readings in the Senate, and will most likely also be reviewed by the Standing Senate Committee on National Finance.

It's uncertain whether these processes can be completed over the next month before the Senate recesses for the summer (currently the last scheduled possible sitting day for the Senate before summer recess is June 25, 2021).

For more information, contact your KPMG advisor.

Information is current to May 17, 2021. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500