CRA tries to make sense of the Bill C-208 provisions

CRA has adopted a number of interpretations of s. 84.1(2.3), which modifies the rule in s. 84.1(2)(e) for exempting, from the application of s. 84.1, certain transfers of QSBC shares or family farm or fishing corporation shares by the taxpayer to a purchaser corporation that is controlled by one or more adult children or grandchildren of the taxpayer.

S. 84.1(2.3)(a) provides that, for the purposes of s. 84.1(2)(e):

(a) if, otherwise than by reason of death, the purchaser corporation disposes of the subject shares within 60 months of their purchase:

(i) paragraph [84.1](2)(e)] is deemed never to have applied, [and]

(ii) the taxpayer is deemed, for the purposes of [s. 84.1], to have disposed of the subject shares to the person who acquired them from the purchaser corporation … .

Regarding the meaning “by reason of death,” CRA stated that it:

would look for a causal link between the death and the subsequent disposition of the shares by the purchaser corporation. For example, the death of an individual may make it impractical or difficult to continue under the current ownership and may precipitate the subsequent sale of the subject shares.

It indicated that, for example, this causal link likely could be established if, following the death of the child wholly-owning the purchaser corporation, her estate sold the QSBC shares back to the taxpayer within the 60-month period.

Regarding how to apply 84.1(2.3)(a)(ii) if the “by reason of death” exclusion did not apply, CRA indicated that it would then determine whether s. 84.1 applied to the initial disposition to the child or grandchild corporation on the basis of whether s. 84.1 would have applied to the subsequent purchaser. Thus if the subsequent purchaser was a third party who dealt at arm’s length with the taxpayer or (to return to the example above) was the taxpayer himself, so that s. 84.1 could not have applied to such a purchaser, s. 84.1 will be considered not to have applied to the disposition by the taxpayer to the child or grandchild corporation.

CRA confirmed that the purported numerical 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) set out 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).

Regarding s. 84.1(2.3)(c), which provides that the taxpayer must provide the Minister with an independent assessment of the FMV of the subject shares and an affidavit signed by the taxpayer and a third party attesting to the disposal of the shares, CRA stated:

[T]he documentary requirements are integral to the application of paragraph 84.1(2)(e) of the Act. That is, these requirements must be met for paragraph 84.1(2)(e) to apply.

Neal Armstrong. Summaries of 3 May 2022 CALU Roundtable Q. 3, 2022-0928721C6 under s. 84.1(2.3)(a), s. 84.1(2.3)(b) and s. 84.1(2.3)(c).