An amalgamation can disrupt Bill C-208 intergenerational planning

The amendments to section 84.1 implemented by Bill C-208 (43rd Parliament, 2nd session) permit intergenerational share transfers to corporations controlled by a child or grandchild to be executed on a tax-efficient basis. If certain conditions are met, parents and grandparents can realize a capital gain on the share sale, potentially claiming their lifetime capital gains exemption, and corporate funds can be used to pay the purchase price.

One such condition is that the purchasing corporation must not dispose of the shares of the operating corporation in the 60 months following the purchase (see paragraph 84.1(2)(e)). If the operating corporation is a wholly-owned subsidiary of the purchasing corporation and the companies amalgamate within that 60-month period, however, the CRA recently said that the condition would not be satisfied (see CRA document no. 2022-0953991E5). The CRA’s stated basis is that paragraph 87(11)(a) deems the purchasing corporation to dispose of its shares of the operating corporation in connection with the amalgamation. The CRA recognizes this is an inappropriate result and, indeed, this anomaly is one among several identified by the tax community in relation to the Bill C-208 amendments. If accepted, the tax treatment on the sale for the parent or grandparent would revert to a deemed dividend, not a capital gain.

In Budget 2023, the Department of Finance proposed a new regime for intergenerational business transfers occurring on or after January 1, 2024 (see Part 1 of our Budget 2023 blog post for a detailed discussion of those proposals).