May 19, 2021

About the Author

  • Leilani Kagan

    Leilani is a partner in the Business Law Group (Tax). Her practice encompasses corporate transactions and all aspects of income and commodity taxation.

    ljk@tdslaw.com
    (204) 934-2363

  • Leo E.K. Palay

    Leo works with both established private businesses and startup businesses in order to maximize tax efficient growth and protect the interest of the founders every step of the way.

    lekp@tdslaw.com
    (204) 934-2576

The Problem

The Income Tax Act (Canada) has long received bipartisan criticism for its overly punitive taxation on the transfer of small business corporations and farms to the next generation. The founders of such businesses were forced into choosing one of three options:

  1. Pay high tax and sell the business to their children. In this situation, the founder parents are using the sale to fund their retirement. This places the parents in a situation where they are either forced to burden their children with funding the founder parents’ retirement, or the parents are unable to rely on the proceeds of the growth of their business to fund their retirement;
  2. Pay less (or no) tax and sell the business to a bona fide third party. There are numerous issues here, such as the fact that the business may be best run as a family business or that there are no interested parties outside of the family; and
  3. The children work together with a bona fide third party purchaser to enable the parents to pay less (or no) tax on the sale of the business. This option requires substantial legal and tax advice in order to mitigate the inherent risks of dealing with a third party and dealing with a potential reassessment by the Canada Revenue Agency (CRA).

The three above options are clearly less than ideal.

The (Potential) Solution

It was reported that on Wednesday, May 12, 2021, Manitoba MP (Brandon-Souris) Larry Maguire’s private member’s bill C-208 to amend the Income Tax Act passed its third reading in Parliament (receiving bipartisan support) and now requires Senate approval.

Bill C-208, in short, amends various sections of the Income Tax Act which restrict a family member’s ability to sell their small businesses or farms on a tax-efficient basis. The bill amends Subsections 55(5)(e)(i) and 84.1(2), and adds Subsections 84.1(2)(e) and 84.1(2.3). The amendments apply to a “qualified small business corporation share” and a share of the capital stock of a “family farm or fishing corporation” as defined in Subsection 110.6(1).

The amended and added provisions require strict compliance and contain limitations (including an anti-flip limitation). It is recommended that you contact one of our TDS Tax Lawyers to advise how this potential change may impact the succession plan and exit strategies for your business.


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This article is presented for informational purposes only. The content does not constitute legal advice or solicitation and does not create a solicitor client relationship. The views expressed are solely the authors’ and should not be attributed to any other party, including Thompson Dorfman Sweatman LLP (TDS), its affiliate companies or its clients. The authors make no guarantees regarding the accuracy or adequacy of the information contained herein or linked to via this article. The authors are not able to provide free legal advice. If you are seeking advice on specific matters, please contact Keith LaBossiere, CEO & Managing Partner at kdl@tdslaw.com, or 204.934.2587. Please be aware that any unsolicited information sent to the author(s) cannot be considered to be solicitor-client privileged.

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