In the last 20 or 30 years we have acted for a number of dentists who have decided to retire with the intention of selling the shares of their dentistry professional corporation (“DPC”) to their children (or grandchildren) who are also dentists, and hopefully enjoy the benefit of the capital gains exemption. Prior to the just passed Bill C-208, a transfer of shares of an active business (such as a DPC) to children or grandchildren resulted in the gain being deemed to be and treated as a dividend and taxable as such. Meanwhile, the sale of the same shares of the DPC to another non-related dentist (not to the retiring dentist’s child) resulted in the retiring dentist (and other family members who owned shares such as a spouse) being able to enjoy the capital gains exemption – i.e. the first approximately $883,000.00 per person selling shares resulting in a tax saving of approximately $200,000.00 per selling shareholder. In effect, all of our dental clients selling shares of their DPC to their children or grandchildren up to now had to pay approximately $200,000.00 per shareholder more than if they sold to an arm’s length dentist based on a capital gain of approximately $800,000.00.

Bill C-208, which was a private member’s bill, has the effect of amending the Income Tax Act, Canada and puts the sale of the shares of your DPC to children or grandchildren who are at least 18 years of age in the same position as selling the shares to an arm’s length dentist. The one condition is that the shareholders cannot dispose of the shares within 5 years of the purchase (unless the child or grandchild dies within the 5 years in which case there will be no loss of the capital gains exemption).

It should be noted that the Department of Finance acknowledged in its July 19 press release that Bill C-208 is law. However, the Department indicated that legislative amendments would be forthcoming to make sure that the provisions of the Income Tax Act , Canada facilitate genuine intergenerational transfers and are not used for artificial tax planning or “surplus stripping” purposes. Finance indicated that amendments would address the following issues:

  • 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
  • The level of involvement of the child or grandchild in the business after the transfer

Finance will bring forward amendments for consultation. Once completed, the amendments would apply either Nov. 1, 2021, or the date of the publication of the final draft legislation–whichever comes later.

All other requirements required to realize the capital gains exemption must still be in place, including the requirement that the value of the active business must exceed the value of the passive assets of the DPC for the 2-year period prior to the sale.

If you are selling your shares to a child or grandchild, we would strongly recommend that you obtain professional advice. If you have any questions or require any assistance, please do not hesitate to contact Kutner Law LLP.

Kutner Law LLP is dedicated to ensuring our clients are informed of changes in the law that would impact them or their businesses, especially in these difficult and trying times. This blog post if for informational purposes only and is not to be construed as legal advice.