Here’s a quick overview of what Bill C208 means and its impact on Canadian Small Businesses.

On June 29, 2021, Bill C-208 received royal assent and was passed into law on July 19, 2021.

What Bill C208 means

Bill C-208 is a law that guides the intergenerational transfer of shares in small businesses and family farms or fishing corporations. It provides tax relief to families through amending the Income Tax Act to enable them to transfer shares to their children or grandchildren without incurring huge tax implications.

The amendments on intergenerational transfers of shares apply if the following three conditions are met:

  • It is a sale of qualifying shares.
  • The purchasing corporation is under the control of one or more of the adult children or grandchildren of the owner.
  • The purchasing corporation cannot dispose of the shares within 60 months of the purchase.

What impact will it have on small businesses?

The law ensures that small businesses, family farms, or fishing corporations will receive similar tax treatment when selling shares to a family member, the same as selling shares to an arm’s length purchaser.

Previously, any transfer or sale of shares from the owner of a corporation to their adult child or grandchild attracted a higher dividend tax rate of up to 48.27%. In comparison, the law was favoured towards the sale of shares by the owner to an arm’s length buyer, where the seller was taxed at a lower capital gains rate to a limit of 27% and could claim capital gains exemption.

Now, it means that any transfer or sale of shares to the corporation owned by a child or grandchild will be taxed as capital gains, and a small business can claim lifetime capital gains exemptions (CGE) up to a limit of $892,218. This is viable as long as the above three conditions are met during the sale.

Key takeaway

While the law aims at fair tax treatment in intergenerational share transfers, it’s complex to navigate, which could expose business owners to costly tax consequences, such as penalties.

It’s important to keep in mind that the department of finance is wary that the bill could be manipulated, causing tax avoidance and be retroactive. Therefore, the department has pushed for the date to be changed from June 29, 2021, to January 1, 2022, including suggesting some amendments which involve legislation.

If you’re looking for an experienced accounting partner to help you understant the impact of what Bill C208 means or, negotiate the sale of your business, contact us.

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