The federal government is proposing to amend rules in Bill C-208 to ensure they apply only where a genuine intergenerational transfer of a business has taken place.
These proposed amendments, included in the 2023 federal budget tabled Tuesday, include new conditions that would have to be met for the business transfer to qualify as a genuine intergenerational transfer. The conditions could be met using either “immediate” or “gradual” intergenerational transfer options. The proposed measures would apply to transfers on or after Jan. 1, 2024.
The proposed changes are intended to address what the government regards as “insufficient safeguards” in Bill C-208, which was passed as a private member’s bill in June 2021. The proposals would prevent the conversion of dividends to capital gains to take advantage of the lower tax rate — also known as surplus stripping — without a genuine transfer of a business between family members taking place.
“Genuine intergenerational transfers are going to be just fine,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth. With the proposed changes, “the government is shutting down loopholes that allowed a business owner to effect a surplus strip without a genuine transfer to the next generation.”
In the budget, the government said that the practice of surplus stripping “undermines integration,” or the principle that income earned individually and corporately should be taxed at generally the same rate, “resulting in individuals who earn the same amount of income having significantly different tax liabilities.”
The government indicated that intergenerational share transfers would continue to be considered genuine where:
- each share of the transferred corporation is a qualified small business corporation share or a share of the capital stock of a family farm or fishing corporation at the time of the transfer; and
- the purchaser corporation is controlled by a person or persons who are all adult children (including grandchildren, nieces and nephews, and grandnieces and nephews) of the transferor.
The budget also proposed adding new conditions for a transfer to qualify as genuine. These conditions address issues the government had with the framework of Bill C-208 in the areas of transfer of control, economic interest and management of the business, and in the degree of involvement of the adult child in the control and running of the business.
To provide taxpayers with flexibility to meet these conditions, the government proposed providing taxpayers with two options: the immediate intergenerational transfer (three-year test) based on an arm’s-length sale term; or a gradual intergenerational business transfer (five-to-10 year test) based on traditional estate freeze characteristics.
The immediate transfer “would provide finality earlier in the process,” but come with more stringent conditions than the gradual transfer.
The government proposed replacing rules introduced in Bill C-208 that apply to subsequent share transfers by the purchaser corporation and the lifetime capital gains exemption with relieving rules that would apply upon a subsequent arm’s-length share transfer or upon the death or disability of a child. There would be no limit on the value of shares transferred relying on this rule.
The transferor and the adult child or children would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child or children would be jointly and severally liable for any additional taxes payable by the transferor in respect of a transfer that does not meet conditions.
The government proposed to extend the limitation period for reassessing the transferor’s liability for tax by three years for an immediate business transfer and by 10 years for a gradual business transfer.
The government also proposes to provide a 10-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.