The Department of Finance recently confirmed that Bill C-208 has been passed by Parliament, received Royal Assent and has become part of Canada’s Income Tax Act. Clarifications to this legislation were also released.

Unintended tax avoidance loopholes were created by Bill C-208 which is why the Government intends to make amendments to Bill C-208. One of the loopholes allowed the opportunity for “surplus stripping,” in which dividends are converted to capital gains to take advantage of the lower tax rate without any genuine transfer of the business actually taking place. Below is a list of issues the amendments to Bill C-208 will address:

  • The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their 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 the grandchild in the business after the transfer.

The Government will release draft legislative amendments for consultation. After this, the government will publish final legislative proposals which would then be introduced in a bill and apply as of the later of either November 1, 2021 or the date of publication of the final draft legislation.