Intergenerational Transfers Bill C-208
Currently Bill C208 allows for a transfer of Qualified Small Business corporation Shares or Qualifying Farm Corporation shares to a company controlled by a child or grandchild (over 18 years of age) of the Transferor without a lot of restrictions.
What is required currently:
The Transferor must dispose of shares and provide Canada Revenue Agency with an independent assessment of the fair market value of the shares involved, as well as an affidavit signed by the vendor and a third party attesting to the disposal of the shares,
The purchasing corporation must be controlled by one or more children or grandchildren and
The child’s corporations may not dispose of the shares purchased within 60 months of the purchase except in the event of death.
What is not required currently:
The child does not have to have legal or factual control of the business after the transfer,
The parents do not have to transfer a majority of the common growth shares to the child at the time of the transfer or into the future,
The parent does not have to transfer management of the company to the child with a specific time period and
The child does not have to be active in the operations of the business after the transfer.
After January 1, 2024
Any transfers after January 1, 2024 will have to meet the requirements of either of the following two options offered:
An immediate intergenerational business transfer (3 year test) based on arm’s length sale terms or
A gradual intergenerational business transfer (5 to 10 year test) based on traditional estate freeze characteristics
Additional requirements after January 1, 2024 for the immediate ( 3 year test) intergenerational business transfer
Parents must immediately and permanently transfer both legal and factual control including an immediate transfer of a majority of voting shares and transfer of the balance of voting shares within 36 months. (Factual control means economic and other influence that allows for effective control of a corporation.)
Parents immediately transfer a majority of the common growth shares and transfer the balance of common growth shares within 36 months
Parents transfer management of the business within a reasonable time (36 months)
Child(ren) retains legal (not factual) control for a 36 month period following the share transfer
At least one child remains actively involved in the business for the 36 month period following the share transfer
Additional requirements after January 1, 2024 for the gradual (5 to 10year) intergenerational business transfer
Parents must immediately and permanently transfer only legal control including an immediate transfer of a majority of voting shares and transfer of the balance of voting shares within 36 months. (Legal control generally means the right to elect a majority of the directors of the corporation.)
Parents immediately transfer a majority of the common growth shares and transfer the balance of common growth shares within 36 months. In addition, within 10 years, parents reduce the economic value of the debt and equity interests to: a) 50% of the value of their interest in a corporation at the initial time of the sale or b)30% of the value of their interest in a small business corporation at the initial time of the sale.
Parents transfer management of the business within a reasonable time (60 months)
Child(ren) retains legal (not factual) control for a 60 month period following the share transfer
At least one child remains actively involved in the business for a 60 month period following the share transfer or until the business transfer is completed
The Transferor and Child(ren) are required to jointly elect for the transfer to qualify as either of the above options. The Child(ren) are jointly and severally liable for any additional taxes payable by the Transferor, because of Section 84.1 of the ITA applying, in respect of a transfer that does not meet the above conditions. The joint election and joint and several liability recognize that the actions of the child could potentially cause the parent to fail the conditions and to be reassessed under Section 84.1. The limitation period for reassessing the Transferor’s liability for tax that ay arise on the transfer is proposed to be extended by three years for an immediate business transfer and by 10 years for a gradual business transfer.Budget 2023 also proposes to provide a 10 year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.