Bill C-208 has botched drafting, and will be substantially re-written

Bill C-208 generally provides that an individual selling qualified small business shares or shares of a family farm or fishing corporation to a corporation controlled by the individual’s children or grandchildren who are at least 18 years of age will benefit from capital gains treatment rather than receive a s. 84.1 deemed dividend provided that such purchaser does not dispose of those shares for at least 60 months.

Given that the children or grandchildren are only required to control (rather than have a substantial equity stake in) the purchaser, this lends itself to “high-octane surplus strips” in which individual owners of a small business corporation can use the capital gains exemption to extract cash from the business, while still retaining virtually all of the equity and upside in the business.

Other anomalies include:

  • The purported numerical formula limitation on the s. 110.6(2) or (2.1) capital gains deduction (based inter alia on the level of the corporation’s taxable capital employed in Canada) in s. 84.1(2.3)(b) is "meaningless" and has no application because it is stated to apply only for the purposes of s. 84.1(2)(e).
  • Furthermore, the math in the formula is wrong – even if it were effective, it would only eliminate the deduction at taxable capital levels of $510 million, not $15 million.
  • There is nothing preventing the children or grandchildren from selling their shares of the purchaser within 60 months, or the subject corporation from selling its business.

The June 30, 2021 Finance press release (made one day after the passage of Bill C-208) effectively indicated that, sometime later this year, the Bill C-208 relief will be retroactively repealed and yet-to-be-determined new provisions will take effect on January 1, 2022. Allan Lanthier sets out in some detail what might be approximately expected in the new legislation.

Neal Armstrong. Summary of Allan Lanthier, “Tax relief for family business transfers: A legislative fiasco” – Part I, Canadian Accountant, 8 July 2021 and Part II, Canadian Accountant, 9 July 2021 under s. 84.1(2)(e).