2024-1003601C6 STEP 2024 – Q6 - Succession of a Family Business

Principal Issues: The application of proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) to certain scenarios presented.

Position: See below.

Reasons: See below.

Author: Ng, Tania
Section: Proposed 84.1(2.31)(f), Proposed 84.1(2.32)(g), Proposed 84.1(2.3)

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 6. Succession of a Family Business

Section 84.1 of the Act is an anti-surplus stripping rule. In general terms, section 84.1 may apply where an individual resident in Canada disposes of shares (the “subject shares”) of the capital stock of a Canadian resident corporation (the “subject corporation”) to another corporation (the “purchaser corporation”) with which the individual does not deal at arm’s length, and immediately after the disposition, the subject corporation would be connected (within the meaning of subsection 186(4)) to the purchaser corporation.

The Fall Economic Statement Implementation Act, 2023 (Bill C-59) includes new provisions, which, if enacted, would deem a taxpayer and a purchaser corporation to deal with each other at arm’s length at the time of the disposition of the subject shares if the conditions in proposed subsection 84.1(2.31), which deals with immediate intergenerational business transfers, or proposed subsection 84.1(2.32), which deals with gradual intergenerational business transfers, are met.

One of the conditions that must be met in relation to both types of intergenerational transfers requires that the child(ren) carry on the acquired business. Specifically, the child or at least one member of a group of children who are the indirect purchasers of the subject shares must be actively engaged on a regular, continuous and substantial basis in “a relevant business of the subject corporation or a relevant group entity” for at least 36 months in the case of an immediate intergenerational business transfer (see proposed subparagraph 84.1(2.31)(f)(ii)) or 60 months, in the case of a gradual intergenerational business transfer (see proposed subparagraph 84.1(2.32)(g)(ii)). For this purpose, there is a reference in both proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) to paragraph 120.4(1.1)(a) which provides that an individual shall be deemed to be actively engaged on a regular, continuous and substantial basis in a business if that individual works in the business on average at least 20 hours per week throughout the portion of the year when the business operates.

We have the following questions in relation to the application of proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii):

(1) Assuming that a group of children are the indirect purchasers of the subject shares, must it be the same individual who meets the threshold of being actively engaged on a regular, continuous and substantial basis in a relevant business of the subject corporation or a relevant group entity throughout the relevant period, or can it be different members of the group of children provided there is at least one member from the group of children who meets the threshold at all times throughout the relevant period?

(2) Would this condition be met if there is an individual who, prior to the transfer of the subject shares, worked full-time in the relevant business for 5 years?

(3) If there are multiple businesses being carried on by several different corporations, would this condition be met if an individual is only considered to be actively engaged on a regular, continuous and substantial basis in one of the businesses?

CRA Response

The purpose of proposed paragraphs 84.1(2.31)(f) and 84.1(2.32)(g), as indicated in the Department of Finance Explanatory Notes, is to ensure that the taxpayer’s child (or group of children) continues to control and carry on the acquired business. It is considered to be one of the hallmarks indicative of a genuine intergenerational business transfer.

Proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) require that “the child, or at least one member of the group of children, as the case may be, is actively engaged on a regular, continuous and substantial basis (within the meaning of paragraph 120.4(1.1)(a)) in a relevant business of the subject corporation or a relevant group entity”. This condition (hereinafter referred to as the “activity threshold”) must be satisfied from the time of a disposition of subject shares by the parent until 36 months after that time, in the case of an immediate intergenerational business transfer, or until 60 months after that time, in the case of a gradual intergenerational business transfer.

Relieving rules to the application of subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) are found in proposed subsection 84.1(2.3), but for purposes of these questions, it is assumed that none of these relieving rules are or will be applicable.

Considering the above, the answers to the questions are as follows:

(1) Proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) clearly indicate that it would be sufficient if at least one member of the group of children meets the activity threshold. Accordingly, where proposed subparagraph 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii), as the case may be, would apply in relation to a group of children, the CRA would not require that a single member of the group of children meet the activity threshold for the entirety of the relevant period. Provided at least one member from the group of children meets the activity threshold at all times throughout the relevant period, we would consider the condition in proposed subparagraph 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii), as the case may be, to be met.

For the purposes of this question, we have assumed that each member of the group of children is: (i) a “child” pursuant to the extended definition found in proposed paragraph 84.1(2.3)(a), and (ii) 18 years of age or older. We have also assumed that the purchaser corporation is controlled by the group of children.

(2) Proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) expressly require that from the time of disposition of the subject shares until 36 months after that time for immediate intergenerational business transfers and 60 months after that time for gradual intergenerational business transfers, the child or at least one member of the group of children, as the case may be, satisfies the activity threshold. Accordingly, any previous engagement or involvement by an individual prior to the disposition of the subject shares by the parent to the purchaser corporation would not be considered in determining whether the condition in proposed subparagraph 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii), as the case may be, is met.

This would be consistent with the stated purpose of proposed paragraphs 84.1(2.31)(f) and 84.1(2.32)(g), noted above, which is to ensure the continued involvement of the taxpayer’s child or group of children, as the case may be, in the acquired business.

(3) In order to respond to Question 3 properly, we are assuming that the corporations referred to are each appropriately considered to be a “relevant group entity” within the meaning of proposed paragraphs 84.1(2.31)(c) and 84.1(2.32)(c) in relation to a single subject corporation whose shares have been disposed of to a purchaser corporation by an individual. We are assuming that each of the corporations referred to in Question 3 are carrying on an active business (referred to as a “relevant business”) that is relevant to the determination of whether the subject shares are “qualified small business corporation shares” or “shares of the capital stock of a family farm or fishing corporation” as these terms are defined in subsection 110.6(1).

As previously noted, proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) require that the activity threshold be satisfied in relation to a relevant business of the subject corporation or a relevant group entity. Accordingly, if an individual is actively engaged on a regular, continuous and substantial basis within the meaning of paragraph 120.4(1.1)(a) in a relevant business of a subject corporation or a relevant group entity, the CRA would consider the condition in proposed subparagraph 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii), as the case may be, to be met.

For greater certainty, in circumstances where an individual disposes of shares of more than one subject corporation to a purchaser corporation, in relation to which there may be one or more relevant group entities (each subject corporation and any corporation appropriately considered to be a relevant group entity in relation to it is hereinafter referred to as a “group of entities”), the conditions in proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii), as the case may be, would need to be satisfied in relation to each group of entities.

Tania Ng
2024-100360

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2024

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2024