Keeping it in the Family

  • June 13, 2022
  • Fayme K. Hodal


Bill C-208 received Royal Assent on June 29, 2021, and brought amendments to section 84.1 which allows for transfers of qualified small businesses, family farms, and fishing corporations to receive the same tax treatment when transferred between family members, as when the business is sold to an unrelated third party.  From an economic policy perspective, these amendments are positive to say the least.

This paper provides a look at how the intergenerational transfer of the family business was previously, and likely unintentionally, caught by portions of the legislation intended to prevent surplus stripping, followed by an overview of the correction to the problem, which was facilitated by the elected Members of Parliament.  The paper then culminates with views from an economic policy perspective, which serve to support the rationale for the amendments.

  1. Introduction

The Canadian Income Tax Act[1] (hereinafter referred to in text as the “Act”) can be said to be many things, and is often referred to as the revenue generating tool the federal government uses to fund its national expenditures.[2]  However, the Act can also be said to be a framework of rules that serves to direct the economic activity in the country.

The taxation structure of a country can encourage certain activities by way of lower rates of taxation and incentives, and discourage other activities with the imposition of penalties or even blanket prohibitions.  In this way, the Act can effectively be understood as an exceptionally large policy document.

One of the activities the Act discourages is certain transfers of property between parties who can be said to not be dealing with each other at arm’s length.  The Act does this by way of a collection of anti-avoidance provisions.  The mischiefs these anti-avoidance rules relating to non-arm’s length transactions are seeking to discourage, are those transfers of property that would prevent the Minister of National Revenue (the “Minister”) from collecting the tax that, but for the non-arm’s length transaction, would properly be collectable.[3]

However, these same anti-avoidance rules sometimes capture transactions which, while not made between arm’s length parties, are not those types of transactions that are advantageous to specifically discourage.  Section 84.1,[4] which is about the non-arm’s length sale of shares, is one such anti-avoidance rule, and which, as a starting point, applies where:

… a taxpayer resident in Canada (other than a corporation) disposes of shares that are capital property of the taxpayer (…the “subject shares”) of any class of the capital stock of a corporation resident in Canada (…the “subject corporation”) to another corporation (…the “purchaser corporation”) with which the taxpayer does not deal at arm’s length and, immediately after the disposition, the subject corporation would be connected (…) with the purchaser corporation[.][5]

According to the Canada Revenue Agency (the “CRA”), s. 84.1 applies where:

  1. a taxpayer resident in Canada (other than a corporation) dispose of shares (the “subject shares”);
  2. the subject shares are of any class of the capital stock of a corporation resident in Canada (the “subject corporation”);
  3. the subject shares are capital property of the taxpayer;
  4. the disposition is to a corporation (the “purchaser corporation”) with which the taxpayer does not deal at arm’s length (…); and
  5. immediately after the disposition, the subject corporation is connected (…) with the purchaser corporation.[6]

Although it may not be obvious on the above, the language of 84.1 could have the effect of catching up intergenerational family businesses operations on transfer from parent to child, and business operations being transferred between family members for any number of non-nefarious reasons.  Indeed, this very concern is what underpinned Private Member’s Bill C-208.[7]

Certainly the notion of a family business that has become successful enough to carry on as an intergenerational endeavour is the type of activity that we, as Canadians, do want to encourage, and so, in order to encourage, or at least not discourage, the intergenerational family farm, fishing corporation, or qualified small business, an amendment to s. 84.1 has come to pass.