How to Transfer Your Family Business Without Triggering a Tax Bill using Bill C-208

Transferring a family business to the next generation has long been a challenge for Canadian entrepreneurs. For decades, selling to your own child’s company was often taxed more harshly than selling to an unrelated buyer, creating a major barrier for families wanting to keep ownership in-house. 

That changed with Bill C-208, first introduced in Parliament in February 2020 by MP Larry Maguire and passed into law on June 29, 2021. The bill amended the Income Tax Act to make certain intergenerational transfers of qualified small business, farm, and fishing corporations eligible for the same tax treatment as arm’s-length sales. 

But there’s a catch: the transfer must meet the Canada Revenue Agency’s (CRA) definition of a “genuine transfer” to qualify. This guide breaks down, in plain language, what that means, and how to structure your transition to avoid an unexpected tax bill. 

The Tax Problem Before Bill C-208 

Under the old rules, selling qualifying shares such as qualified small business corporation (QSBC) shares or family farm or fishing corporation shares to a company controlled by your child, meant the capital gain might be re-characterized as a taxable dividend. That triggers a much higher tax rate and can disqualify access to the LCGE entirely, adding significant tax cost compared to an arm’s-length buyer.  

 What Bill C-208 Changed 

Since passed, Bill C‑208 amended the Income Tax Act to create relief for genuine intergenerational transfers. Instead of being treated as a dividend, the sale can now be treated like an arm’s-length disposition, meaning: 

• The gain qualifies for capital gains treatment 
• Eligible for the LCGE, if available 

Key Conditions You Must Meet: 

• You’re a Canadian resident individual (not a corporation). 
• You’re transferring QSBC shares, or shares in a family farm or fishing corporation. 
• The purchasing corporation is controlled by your child or grandchild, aged 18 or over. 
• That purchaser company does not dispose of the shares within 60 months (five years). 
• You submit an independent valuation report and a sworn affidavit confirming the transfer. 
• If your business has taxable capital over $10 million, your LCGE is reduced and eliminated entirely over $15 million.  

 How CRA Compliance Works: Documents and Details 

To qualify, CRA requires solid supporting documentation: 

• Independent Valuation Report: Prepared by someone with no ties to the business, using accepted valuation methods. It should include valuation calculations, assumptions, asset appraisals, and methodology.  
• Affidavit: Sworn by you and witnessed by a commissioner or notary, confirming transfer details: business identity, share type, purchaser details, and confirmation of relation and control.  

If filing on paper, include both documents with your return; for electronic filing, retain them in case CRA questions the transfer.   

Beware: Ensuring It’s a “Genuine” Transfer 

To prevent abuse, such as “surplus stripping”, authorities have set additional requirements. These are especially applicable for transfers on or after January 1 2024, under changes introduced in Budget 2023 and Bill C‑59: 

Two Pathways: 

1. Immediate Business Transfer (IBT): Parent gives up both legal and economic control within 36 months; child must manage and be actively involved; child must retain control for at least 36 months. 
2. Gradual Business Transfer (GBT): Parent gives up legal control only, with economic involvement allowed but gradually reduced to below thresholds (30% for QSBC, 50% for farm/fishing) within 10 years. Child must remain actively involved and in control for at least 60 months. 

Both require a joint election (by parent and child) in a prescribed form and extend the CRA reassessment period: 3 years for IBTs, 10 years for GBTs.  

Final Thoughts 

Bill C-208 opened an important pathway for family businesses to continue under new stewardship without punitive tax costs, if set up properly. However, the benefit is not automatic. To secure the preferred tax treatment, you must demonstrate a genuine shift in control, follow the CRA’s detailed requirements, and keep meticulous documentation for years after the transfer. If you’re planning a transfer, whether now or in the next few years - start early. The right strategy can align your family’s goals, satisfy CRA’s rules, and position the next generation for long-term success. Speak with your advisor to explore your options and build a plan that ensures your business, and your legacy, continue on your terms. 

Disclaimer: This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. The details regarding Bill C-208, the Income Tax Act, and related Canada Revenue Agency (CRA) requirements are subject to change, and their application depends on individual circumstances, including corporate structure, ownership history, and the nature of the business. Readers should not rely solely on the information herein to make decisions about business succession or tax planning. Before implementing any strategy or completing a transfer, consult with qualified legal, tax, and financial professionals who can provide advice tailored to your unique situation and objectives.