If an individual or other non‑corporate Canadian resident taxpayer disposes of 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 disposition, the subject corporation is connected with the purchaser corporation, the taxpayer is subject to section 84.1 of the Income Tax Act (ITA) and may be deemed to have received a dividend instead of any expected capital gain. Prior to June 29, 2021, this resulted in the denial of a tax‑efficient intergenerational transfer of a corporate business from parents and grandparents to their respective children and grandchildren.
On June 29, 2021, Bill C‑208 enacted legislative amendments providing an exception to the application of section 84.1 of the ITA if certain conditions were met under paragraph 84.1(2)(e) and subsection 84.1(2.3) of the ITA, allowing parents or grandparents to transfer the subject corporation to a purchaser corporation controlled by adult children or grandchildren.
On Aug. 4, 2023, the Department of Finance released revised draft legislation, which was revised further before receiving Royal Assent on June 21, 2024 in Bill C‑59. This legislation amends the provisions enacted under Bill C‑208 and applies to dispositions that occur on or after Jan. 1, 2024.
The purpose of the amendments is to introduce specific criteria limiting the exception to the application of section 84.1 of the ITA to genuine intergenerational transfers. The criteria fall under one of two legislative options: (1) immediate transfer option (within 36 months) and (2) gradual transfer option (within 60 to 120 months).
This table provides a comparison of the criteria used to determine if the exception to section 84.1 applies based on the old rules enacted under Bill C‑208 and the current rules enacted under Bill C‑59 under either the immediate transfer option or gradual transfer option.
(A) Immediately before disposition time
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Control of subject corporation before sale | Not applicable | This condition was removed in the final version of the legislation. | |
| Previously sought an exception pa. 84.1(2.31)(a) pa. 84.1(2.32)(a) | The taxpayer has not previously sought an exception to 84.1(1) under these rules (either immediate or gradual) at any time after 2023 in respect to a disposition of shares that derived their value from an active business that is relevant to the determination of whether the subject corporation shares qualify, as outlined in section (B) | ||
(B) At disposition time
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Taxpayer (vendor) pa. 84(2.31)(a) pa. 84(2.32)(a) | Taxpayer must be an individual (other than a trust) | ||
| Subject corporation qualification spa. 84.1(2.31)(b)(i) spa. 84.1(2.31)(b)(i) | Shares of the subject corporation must be qualified small business corporation shares (QSBC) or shares of the capital stock of a family farm or fishing corporation (FFFC) | ||
| Control of purchaser corporation sp. 84.1(2.31)(b)(ii) sp. 84.1(2.32)(b)(ii) | Controlled by one or more children or grandchildren of the taxpayer who are 18 years of age or older | Controlled by one or more children of the taxpayer, each of whom is 18 years of age or older | |
| Definition of child or children pa. 84.1(2.3)(a) | The extended meaning of “child” under ITA 252(1) applies, which includes:
| A “child” as defined for these provisions includes:
The extended meaning of “child” under ITA 252(1) also applies, which includes:
| |
(C) At all times after the disposition time
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Taxpayer gives up control of business pa. 84.1(2.31)(c) pa. 84.1(2.31)(c) | Not applicable | The taxpayer, either alone or together with their spouse* does not control (directly or indirectly in any manner whatever):
Note that this requires giving up both legal (de jure) and factual (de facto) control. | The taxpayer, either alone or together with their spouse* does not control:
Note that this requires giving up legal (de jure) control only. |
| Taxpayer gives up majority of economic interest pa. 84(2.31)(d) pa. 84(2.32)(d) | Not applicable | The taxpayer, either alone or together with their spouse*, does not own (directly or indirectly)
| |
(D) Within 36 months of the disposition time and at all times thereafter
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Taxpayer gives up remaining share interest (control and economic interest) pa. 84.1(2.31)(e) pa. 84.1(2.32)(e) | Not applicable | The taxpayer and their spouse* does not own (directly or indirectly)
| |
(E) Within 36 months (immediate option) or 60 months (gradual option) of the disposition time (can be longer than 36 months or 60 months, respectively, if reasonable in the circumstances)
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Taxpayer transfers management of business pa. 84.1(2.31)(g) pa. 84.1(2.32)(h) | Not applicable | The taxpayer and their spouse* take reasonable steps to:
"Management" here is defined as the direction or supervision of business activities but not the provision of advice. Exceptions (spa. ITA 84.1(2.3)(e) through (h)):
| |
(F) From disposition time until 36 months after that time (immediate option) or from the disposition time until the later of 60 months after the disposition time and the final sale time (gradual option)
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| A child is actively engaged in the business spa. 84.1(2.31)(f)(ii) spa. 84.1(2.32)(g)(ii) | Not applicable | The child or at least one member of the group of children is actively engaged on a regular, continuous and substantial basis in a relevant business of the subject corporation or a relevant group entity Exceptions (spa. ITA 84.1(2.3)(e) through (h)):
| |
| Children retain control spa. 84.1(2.31)(f)(i) spa. 84.1(2.32)(g)(i) | Not applicable | The child or group of children controls the purchaser corporation Exceptions (spa. ITA 84.1(2.3)(e) through (h)):
| |
| Active business spa. 84.1(2.31)(f)(iii) spa. 84.1(2.32)(g)(iii) | Not applicable | Each relevant business of the subject corporation and any relevant group entity is carried on as an active business Exceptions (spa. ITA 84.1(2.3)(e) through (h)):
| |
(G) Within 10 years after the disposition time and at all times thereafter
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Taxpayer meets legislative percentages of debt and equity interest pa. 84.1(2.32)(f) | Not applicable | No requirement | QSBC and FFFC – debt and equity interests retained (directly or indirectly) by the taxpayer and their spouse* in any of the:
|
(H) Other relevant information
| Specific criteria necessary for exception to section 84.1 of the ITA | Current rules enacted under Bill C‑208 (effective June 29, 2021 to Dec. 31, 2023) | Option 1 (effective Jan. 1, 2024) | Option 2 (effective Jan. 1, 2024) |
| Elections pa. 84.1(2.31)(h) pa. 84.1(2.32)(i) | No election, but the following filing requirements apply:
Per Canada Revenue Agency – include documentation for paper return or retain documentation for electronically filed return | Taxpayer and child file joint election on or before the taxpayer’s filing‑due‑date for the year that includes the disposition time | |
| Normal reassessment period pa. 152(4)(b.9) | 3‑year normal reassessment period | Additional 3 years after the end of the 3‑year normal reassessment period | Additional 10 years after the end of the 3‑year normal reassessment period |
| Joint liability between taxpayer (vendor) and child(ren) ss. 160(1.5) | Not applicable | Parties to the joint election are jointly and severally or solidarily liable for the tax payable by the taxpayer to the extent that the tax payable by the taxpayer is greater than it would have been if the conditions of subsection 84.1(2.31) – immediate option or 84.1(2.32) – gradual option respectively were met. | |
| Reserve ss. 40(1.2) | 5‑year capital gains reserve | 10‑year capital gains reserve if all conditions for intergenerational business transfer are met | |
| Capital gains deduction grind | Capital gains deduction grind for taxable capital employed in Canada in excess of $10,000,000 | Not applicable | |
| Restriction on disposition of subject corporation shares | Purchaser corporation cannot dispose of the subject corporation shares within 60 months of original purchase, otherwise than by reason of death | No specific requirement other than those discussed in section (F) | |
* Spouse also includes common‑law partner
** 256 (1.1) Definition of “specified class” means a class of shares of the capital stock of a corporation where, under the terms or conditions of the shares or any agreement in respect thereof,
- the shares are not convertible or exchangeable;
- the shares are non‑voting;
- the amount of each dividend payable on the shares is calculated as a fixed amount or by reference to a fixed percentage of an amount equal to the fair market value of the consideration for which the shares were issued;
- the annual rate of the dividend on the shares, expressed as a percentage of an amount equal to the fair market value of the consideration for which the shares were issued, cannot in any event exceed,
- where the shares were issued before 1984, the rate of interest prescribed for the purposes of subsection 161(1) at the time the shares were issued, and
- where the shares were issued after 1983, the prescribed rate of interest at the time the shares were issued; and
- the amount that any holder of the shares is entitled to receive on the redemption, cancellation or acquisition of the shares by the corporation or by any person with whom the corporation does not deal at arm’s length cannot exceed the total of an amount equal to the fair market value of the consideration for which the shares were issued and the amount of any unpaid dividends thereon.
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