Quebec is amending its intergenerational transfer rules to ensure eligible individuals can continue to qualify for existing provincial relief, following changes to the federal rules. Under this provincial relief, an individual who disposes of certain eligible shares to a non-arm's-length corporation in a genuine intergenerational transfer, may be able to designate all or part of a resulting deemed dividend as a deemed capital gain, if certain conditions are met.
This amendment allows certain individuals to access Quebec's relief, despite the new federal intergenerational transfer rules. Specifically, the amount an eligible individual can designate as a deemed capital gain under Quebec's current rules cannot exceed the federal deemed dividend amount (which may now be reduced if the new federal intergenerational transfer rules apply). Quebec's amendment addresses this issue to ensure that the amount an eligible individual may designate under the provincial relief is not affected by these recent federal changes.
These amendments apply to eligible transfers on or after June 29, 2021 (i.e., when the federal intergenerational rules in Bill C-208 came into force). Quebec announced these changes in Information Bulletin 2021-6 on August 12, 2021.
Where a non-arm's-length sale of shares meets the conditions under the Quebec intergenerational transfer rule (section 517.5.5 of the Quebec Taxation Act (QTA)), an individual can designate all or a portion of the deemed dividend amount arising from the transfer to be a deemed capital gain. The amount that may be designated is limited to the lesser of:
- The amount of the deemed dividend under the QTA
- The amount of the deemed dividend under paragraph 84.1(1)(b) of the federal Income Tax Act (note that the amendment would adjust this so that it would be the amount that would be determined "but for" the federal amendments in Bill C-208).
The Quebec intergenerational transfer rule may apply where an individual (other than a trust) transfers qualified small business corporation shares or shares of a family farm or fishing corporation to a non-arm's-length corporation. Generally, for this rule to apply, the individual (or the individual's spouse) must be active in the business for 24 months immediately preceding the sale and inactive in the business after the sale (subject to certain exceptions). In addition, over the period that begins 30 days after the sale to the end of the series of transactions that includes the sale, the individual must not:
- Control the corporation whose shares were sold or another corporation in which that corporation held a substantial interest prior to the sale
- Hold common shares of the corporation (directly or indirectly) or shares of a corporation in which that corporation held a substantial interest immediately before the sale.
Quebec has also enacted complex rules to limit the amount of residual participation that an individual may hold in the corporation after the sale.
Finally, the Quebec intergenerational transfer rule stipulates that at least one shareholder of the purchaser (or their spouse) must play an active role in the business of the corporation (or a corporation in which that corporation had a substantial interest prior to the sale) throughout the period that begins immediately after the sale of shares until the end of the series of transactions that includes the sale.
Federal intergenerational transfer rules
The federal intergenerational transfer rules provide that, where a taxpayer transfers shares of a qualified small business corporation or shares of a family farm or fishing corporation to a corporation controlled by their adult children or grandchildren, the transfer will not result in a deemed dividend to the taxpayer where certain conditions are met. The conditions required under the federal rules, which apply to transfers on or after June 29, 2021, differ from those in the Quebec legislation. However, Finance has indicated that it will introduce further amendments to apply as early as November 1, 2021.
For the latest update on the federal intergenerational rules, see TaxNewsFlash-Canada 2021-41, "New intergenerational rules — More Changes Coming".
For more information, contact your KPMG adviser.
Information is current to August 23, 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