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Will Bill C-208 reduce tax on inter-generational business transfers?

June 9, 2021

Authored by RSM Canada LLP

Cleo L. Melanson, CPA, CA, CMA shared this article

Archived Article Please note that this article is reflective of the relevant legislation, regulations, and information at the time of publishing and does not contemplate any changes that have occurred since that time.


Often, family members that own a small business intend to grow it into a legacy for future generations. However, existing private company rules can make the taxation and succession of these businesses complicated to navigate. For example, a sale of these companies at fair market value to a related person – like children or grandchildren - is generally less advantageous from a tax perspective than a sale to an arm’s length third party due to section 84.1 of the Income Tax Act (ITA).  

Many small businesses, farms and fisheries meet the definition of ‘Qualified Small Business Corporations’ (QSBC). The sale of QSBC shares is generally eligible for up to $1,000,000 of lifetime capital gains exemption (LCGE). However, anti-avoidance rules contained in section 84.1, among others, can prevent the use of this LCGE when the sale is made to a related party. 

Very generally, section 84.1 of the ITA attempts to limit surplus stripping through non-arm’s length sales or transfers. This provision can result in the proceeds of sale being treated as a dividend rather than a capital gain. In addition to limiting access to the LCGE, dividends received by individuals are subject to a higher tax rate than a capital gain. Consequently, under the current legislation, a sale of QSBC shares to a related party can result in less favourable tax treatment than a sale to an arm’s length party.

Bill C-208 intends to limit the application of section 84.1 in the case of inter-generational transfers of businesses. The Bill would exclude QSBC shares (including farm and fishing corporations) from section 84.1 when sold to a child or grandchild and held by the purchaser for a minimum of 60 months. 

In its 2021 Budget, the Quebec government announced similar legislative changes to facilitate inter-generational transfers of business.     

These relatively small additions to the ITA could result in groundbreaking changes in how entrepreneurs, farmers and fishers transition their business to the next generation, as well as reduce the tax applicable thereon. 

Unlike most private member bills that usually do not progress past first or second reading, Bill C-208 passed third reading on May 12, 2021 and is next headed to the Senate for review. It will be interesting to see whether this private member Bill will become law. 

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This article was written by Jen Reid, Chetna Thapar and originally appeared on 2021-06-09 RSM Canada, and is available online at

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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