DFK Tax Newsletter


Summer 2021 Edition - September 8, 2021 - Derek Wagar, Tax Partner, Fruitman Kates

Private Member’s Bill C-208 – Changes to Section 84.1

Anyone who has been following Bill C-208 will know that it has been a confusing process to implement the legislation.  Bill C-208 is a Private Member’s Bill that amends Section 84.1 of the Income Tax Act (ITA) that received royal assent on June 29, 2021.  The amendments to Section 84.1 of the ITA are poorly written and appear to be broader than what was intended.  As a result, the federal government initially stated that they would introduce legislation to clarify that the new rules would be effective on January 1, 2022. On July 19, 2021, the federal government acknowledged that Bill C-208 is now law and indicated that it will be amending the law as early as November 1, 2021.


Section 84.1 of the ITA is an anti surplus stripping provision. Under the old rules, Section 84.1 made it more expensive for a parent to sell their shares of a qualified small business corporation (QSBC), a family farm corporation or a family fishing corporation (collectively referred to as “Qualifying Shares”) to a company owned by their child or grandchild (or any other related party) when compared to a sale to a third party.  The parent will usually want to use their capital gains exemption (CGE) to shelter all or a portion of the capital gain on the sale from tax.  The CGE is currently $892,218 for QSBC shares and $1,000,000 for shares of a family fishing or family farming corporation.  When Section 84.1 does not apply, it is more tax efficient for the purchaser to use a corporation and use corporate funds to pay the purchase price, rather than incur personal tax and use after tax personal funds.  When the sale is to a third party there is no issue with this. Under the rules before Bill C-208, when the sale was to a corporation owned by a related party such as a child or grandchild, Section 84.1 would apply, the capital gain would be recharacterized to be a deemed dividend, and the seller could not use their CGE.  The alternative was for the child or grandchild to buy the shares directly rather than through a corporation.  This made the purchase price more expensive to the child or grandchild as they would have to use after tax personal funds rather than after tax corporate funds to purchase the shares.


The amendments to Section 84.1 of the ITA are intended to allow for the sale of Qualifying Shares to a corporation controlled by the seller’s adult children or grandchildren (but not any other related party).  The new rules will result in Subsection 84.1(1) not applying when the following conditions are met:

  • The shares sold are QSBC shares or shares of a family fishing or family farm corporation;
  • The purchasing corporation is controlled by one or more children or grandchildren (18 years or older) of the taxpayer selling the shares; and
  • The purchaser corporation does not dispose of the acquired shares within 60 months of the purchase.

The benefits of these new rules are intended to be reduced where the taxable capital of the corporation being sold is between $10M and $15M and eliminated where taxable capital is over $15M. (The same range used to phase out the small business deduction. Taxable capital is roughly equal to a company’s total liabilities and equity minus trade accounts payable.)  

There is also a requirement that the seller provide the Canada Revenue Agency with an independent assessment of the fair market value of the shares being sold, and a signed affidavit from the seller and a third party confirming the sale occurred.


The policy objective behind the amendments to Section 84.1 of the ITA was to allow for the legitimate sale of Qualifying Shares by a taxpayer to their child or grandchild who would be active in the business and continue to operate it.  In these circumstances the tax rules should be the same as if the shares were sold to a third party.  

The legislation only requires that the child or grandchild control the purchasing corporation. There is no requirement that they control the company whose shares are being acquired, nor is there a requirement that they be active in the business operations of that company.  The concern is that taxpayers will use the amended rules to extract corporate surplus as a capital gain instead of a dividend and use their CGE to do so without paying tax in situations where the child or grandchild has no intention of taking over and operating the business.

In its July 19, 2021, news release, the federal government listed the following issues that they plan to address with legislation to amend Section 84.1 of the ITA:

  • The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to the child or grandchild;
  • The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;
  • The requirements and timeline for the parent to transition their involvement in the business to the next generation; and
  • The level of involvement of the child or grandchild in the business after the transfer.

There appears to be an opportunity for owners of Qualifying Shares to take advantage of the new rules in Section 84.1 before they are amended