All About Estates

Genuine intergenerational transfers

For many years, non-arm’s length intergenerational transfers of corporate businesses were treated inequitably under the Income Tax Act (ITA).  A transfer of a corporate business between non-arm’s length parties[1] resulted in dividend treatment to the vendor instead of capital gains treatment, precluding the ability to claim the capital gains deduction.  With the inability to claim the capital gains deduction and the loss of the preferential tax treatment for capital gains, you can see the inequity that existed in our tax system.

This was most noticeable when parents tried to transition their corporate business to their children realizing that it was more tax efficient to sell the corporate business to an arm’s length person instead. Faced with this scenario, many individuals and organizations lobbied their members of parliament to invoke a change in the tax system to create a more equitable result when transitioning corporate businesses within a family unit.

Enter Bill C-208

Conservative MP, Larry Maguire sponsored private member’s Bill, C-208[2], which was drafted to eliminate the unfairness in the tax system and give non-arm’s length intergenerational transfers of corporate businesses the same tax treatment afforded arm’s length transfers – capital gains treatment.

This bill was unsuccessfully contested by Department of Finance[3] (Finance), and as of June 29, 2021 the legislative amendments to the ITA under Bill C-208 became law, opening the door for non-arm’s length intergenerational transfers to be on par with arm’s length transfers[4].

Finance concerned with integrity

Prior to the enactment of Bill C-208, Finance was well aware of this long-standing issue, but given the difficulty of legislating appropriate criteria to only allow genuine non-arm’s length intergenerational transfers, Finance opted for status-quo.  That is until Bill C-208 became law opening the door without proper safeguards allowing potentially abusive tax planning to extract tax-free corporate surplus without actually transitioning the business.  In the Standing Committee on Finance, Mr. Trevor McGowan (Associate Assistant Deputy Minister at Finance Canada) stated that Bill C-208 lacked appropriate safeguards:

That level of abstraction from the actual business—where a parent wants to hand it over to their child or to their grandchild, so they can carry it on, keep it going, continue building it and continue running the business—is not directly provided in the bill due to this abstraction, just looking at transfers of shares going from one to another. It’s that lack of precise targeting that I think we want to highlight as being a concern with the measure.

I could provide a few more details on that. In particular, the rule doesn’t require the child, after the transfer, to be involved in the business in any way. It doesn’t require the parent to cease to be involved in the business after the transfer of the shares. In fact, the parent could simply wind up the business right after the transfer.

As a result, Finance was backed into a corner and needed to respond with legislative amendments in an order to limit the newly enacted legislation to genuine non-arm’s length intergenerational transfers.

Budget 2023

Finance introduced draft legislation in budget 2023[5] proposing amendments to the rules introduced by Bill C-208 to address their concerns.

The proposed amendments still require a transfer of a qualified small business corporation or a family farm or fishing corporation to an adult child but introduce specific requirements to try and distinguish between genuine and non-genuine non-arm’s length intergenerational transfers. The proposed requirements, which differ between an immediate transfer (up to 36 months) and a gradual transfer (up to 120 months), fall under these five categories:

  1. Transfer of control of the business,
  2. Transfer of economic interests in the business,
  3. Transfer of management of the business,
  4. Child retains control of the business, and
  5. Child works in the business.

With the proposed amendments under these five categories, Finance is attempting to insert some integrity back into the ITA to allow genuine non-arm’s length intergenerational transfers while minimizing potentially abusive surplus strips.

As we work through the rules, which take effect on January 1, 2024, we will soon learn if Finance was successful or not.

Visit to view the infographic on intergenerational transfers


[1] In this blog, the transfer of a corporate business between two non-arm’s length parties refers to a transfer of shares of a subject corporation from an individual to a corporate entity, which does not deal at arm’s length with the individual.

[2] For a history of Bill C-208 read the following blog – Bill C-208 the race to the finish line – All About Estates

[3] For a review of Department of Finance’s response to Bill C-208 read the following blog – The Finance Strikes Back – All About Estates

[4] The legislative provisions enacted under Bill C-208 contained specific requirements under paragraph 84.1(2)(e) and subsection 84.1(2.3) of the Income Tax Act.

[5] Budget 2023 was announced on March 28, 2023

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.


  1. Glen

    April 18, 2023 - 7:42 pm

    This is an excellent summary of our current situation and I have high hopes that there will be follow up posts once the air is clear on where this settles out. Many thanks

    • John Oakey

      April 19, 2023 - 12:36 pm

      Thank you for your comment. Baker Tilly Canada, National Tax Services, will be releasing an article along with a table that provides a comparison of the criteria used to determine if the exception to 84.1 applies based on the current rules enacted under Bill C-208 and the rules proposed in the 2023 Federal budget under either the immediate transfer option or the gradual transfer option. The article is set to be released on April 21st thru social media as well as

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