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April 14, 2022 | Blog

Changes to Intergenerational Transfers

Bill C-208, introduced in June 2021, made significant changes to specific anti-avoidance rules related to intergenerational transfers of family corporations. Let’s have a look at these changes.

From tax expert Gerry Vittoratos

Bill C-208, introduced in June 2021, made significant changes to specific anti-avoidance rules related to intergenerational transfers of family corporations. Let’s have a look at these changes.

Section 84.1 - Surplus Stripping

Section 84.1 of the ITA was set up by the federal government to prevent what it deems as surplus stripping. The purpose is to prevent shareholders from withdrawing profits generated by the corporation through a tax-preferred return on capital instead of a taxable dividend. For example, an exchange of shares of an operating company to a holding company owned by related persons for the purpose of crystallizing the capital gains deduction. Crystallizing the capital gains deduction is typical in estate freeze techniques used by family corporations to pass on shares to the next generation. This rule strongly hinders these intergenerational transfers.

In a previous blog article, we went into detail about this anti-avoidance rule and what specifically triggers the rule. Here are the conditions [ITA 84.1(1)]:



Taxpayer resident in Canada (other than a corporation)


Disposes of shares that are capital property of the taxpayer (“subject shares”)


Shares disposed are capital stock of a corporation resident in Canada (“subject corporation”)


Shares are acquired by another corporation (“purchaser corporation”)


Taxpayer and purchaser corporation does not deal at arm’s length [ITA 251(1)/251(2)]


Purchaser corporation and subject corporation are connected corporations after the transaction [ITA 186(4)]

Bill C-208 amends one of these conditions, condition #5 above, by changing the definition of an arm’s length person. Starting in 2021 (as of June 29, 2021), the taxpayer and the purchaser corporation are deemed to be dealing at arm’s length if the purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 18 years of age or older [ITA 84.1(2)(e)]. In order for this new interpretation of arm’s length to apply, the purchaser corporation cannot dispose of the shares within 60 months of their purchase [ITA 84.1(2)(e)].

The bill also limits the claim of the capital gains deduction by reducing it [ITA 110.6(2) & (2.1)] for the seller if the corporation has taxable capital above 10 million dollars, and eliminating it if taxable capital is above 15 million [ITA 84.1(2.3)(b)].

Section 55 - Capital Gains Stripping

Another anti-avoidance measure, section 55, prevents certain arrangements for converting the capital gain that would be realized on the disposition of a share into a tax-free dividend by using the inter-corporate dividend deduction [ITA 112(1), 112(2), 138(6)]. Under this section, the dividend received through these arrangements is requalified as a capital gain, or as proceeds of a disposition to be considered in computing a capital gain [ITA 55(2)].

The conditions that trigger this section are [ITA 55(2.1)]:


a taxable dividend received by a corporation resident in Canada (in subsections (2) to (2.2) and (2.4) referred to as the dividend recipient) as part of a transaction or event or a series of transactions or events if:


the dividend recipient is entitled to a deduction in respect of the dividend under subsection 112(1) or (2) or 138(6);



one of the purposes of the payment or receipt of the dividend (or, in the case of a dividend under subsection 84(3), one of the results of which) is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend,


the dividend (other than a dividend that is received on a redemption, acquisition cancellation of a share, by the corporation that issued the share, to which subsection 84(2) or (3) applies) is received on a share that is held as capital property by the dividend recipient and one of the purposes of the payment or receipt of the dividend is to effect:

·        a significant reduction in the fair market value of any share, or

·        a significant increase in the cost of property, such that the amount that is the total of the cost amounts of all properties of the dividend recipient immediately after the dividend is significantly greater than the amount that is the total of the cost amounts of all properties of the dividend recipient immediately before the dividend;


the amount of the dividend exceeds the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received.


The dividend is not subject to Part IV tax [ITA 55(2)].

Section 55 does not apply if the series of transactions is done amongst related persons [ITA 55(3)(a)]. However, under the old rules, siblings were considered as unrelated for the purposes of this section [ITA 55(5)(e)(i)]. Bill-C-208 amends this definition, and now siblings can be considered related if the dividend received from the corporation is the capital stock of a qualified small business corporation share or a share of the capital stock of a family farm or fishing corporation, within the meaning of subsection 110.6(1) [ITA 55(5)(e)(i)].

Other Considerations and Possible Future Amendments

The amendments brought by Bill C-208 above substantially removes impediments to intergenerational transfers for family corporations. However, there are some potential important loopholes in these amendments that haven’t been addressed yet. For example, although there is a requirement that the purchaser corporation not sell the shares within 60 months of purchase, there is nothing that requires the children to be the shareholders of the purchaser corporation for the duration of the 60-month period, or to have any involvement in the business. Another potential loophole is the fact that there is nothing in the amendments that prevents the parent from buying the purchaser corporation later on. In essence, a lot of necessary fine print is missing from these amendments that would prevent family corporations from potentially exploiting these loopholes.

Finance Canada addressed these potential loopholes in a news release. The department is proposing, in future amendments, to address:

·        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.

The takeaway from the news release above is when implementing these intergenerational transfers, to be mindful of the future potential changes to these amendments. The federal government is keen on making sure that these transfers are bona fide transfers between family members, and that the subject corporations and purchaser corporations are truly controlled, for an extended period of time, by the family members.

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