Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Marginal note:Capital gains deduction for qualifying business transfer – conditions

• 110.61 (1) Subsection (2) applies to an individual (other than a trust) if, at the time of a disposition (referred to in this section as the “disposition time”) of shares of the capital stock (referred to in this section as the “subject shares”) of a corporation (referred to in this section as the “subject corporation”) to a trust (or to a purchaser corporation wholly owned by the trust) that occurred after 2023 and before 2027 under a qualifying business transfer, the following conditions are met:

  • (a) no individual has prior to the disposition time sought a deduction under this section in respect of a disposition of shares that, at the time of that disposition, derived their value from an active business that is also relevant to the determination of whether the disposition of the subject shares satisfies the condition set out in paragraph (a) of the definition qualifying business transfer in subsection 248(1);

  • (b) throughout the 24 months immediately preceding the disposition time,

    • (i) the subject shares were not owned by anyone other than the individual or a person or partnership related to the individual, and

    • (ii) more than 50% of the fair market value of the subject shares was derived from assets which were used principally in an active business;

  • (c) immediately before the disposition time,

    • (i) the subject corporation and each corporation affiliated with the subject corporation in which the subject corporation owns (directly or indirectly) shares is not a professional corporation, and

    • (ii) the trust does not control a corporation whose employees are beneficiaries of the trust;

  • (d) at the disposition time,

    • (i) the individual is at least 18 years of age,

    • (ii) throughout any 24-month period ending before the disposition time, the individual, or a spouse or common-law partner of the individual, was actively engaged on a regular and continuous basis in the business that is relevant to the determination of whether the subject shares satisfy the condition set out in paragraph (a) of the definition qualifying business transfer in subsection 248(1), and

    • (iii) at least 75% of the beneficiaries of the trust are resident in Canada; and

  • (e) the trust, any purchaser corporation owned by the trust, the individual and any other individual entitled to a deduction under subsection (2) in respect of the qualifying business transfer

    • (i) jointly elect, in prescribed form, for the deduction provided under subsection (2) to apply in respect of the disposition of the subject shares,

    • (ii) include the following information in the election:

      • (A) an amount (in this paragraph referred to as the “elected amount”) equal to the total amount of capital gains that the parties agree may be eligible for a deduction under subsection (2) with respect to the qualifying business transfer, not exceeding $10,000,000, and

      • (B) if more than one individual is eligible for a deduction in respect of the qualifying business transfer, the percentage of the elected amount that is assigned to each eligible individual (provided that the total percentages assigned to all individuals cannot exceed 100%), and

    • (iii) file the election with the Minister on or before the trust’s filing-due date for the taxation year that includes the disposition time.

• Marginal note:Capital gains deduction — qualifying business transfers

  (2) If this subsection applies to an individual, in computing the taxable income for a taxation year of the individual, there may be deducted such amount as the individual may claim not exceeding the least of

  • (a) the amount that would be determined in respect of the individual for the year under paragraph 3(b) (to the extent that that amount is not included in computing an amount determined under paragraph 110.6(2)(d) or (2.1)(d) for the individual) in respect of capital gains and capital losses if the only properties referred to in paragraph 3(b) were the subject shares of the individual, and

  • (b) an amount determined by the formula

    A × B × C − D

    where

    A

    is the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e),

    B

    is

    • (i) 1, unless more than one individual is entitled to a deduction under this subsection in respect of the qualifying business transfer,

    • (ii) the percentage assigned to the individual in the joint election referred to in paragraph (1)(e), if a percentage is assigned to the individual in accordance with clause (1)(e)(ii)(B), and

    • (iii) in any other case, nil,

    C

    is the fraction of the taxpayer’s capital gain from the disposition of the subject shares that is a taxable capital gain under paragraph 38(a) that applies to the subject shares in the year, and

    D

    is the total of each amount claimed by the taxpayer under this subsection in a prior taxation year in respect of the disposition of the subject shares multiplied by the amount determined by the formula

    E ÷ F

    where

    E

    is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the current year, and

    F

    is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the prior year in respect of the disposition of the subject shares.

• Marginal note:Disqualifying event

  (3) For the purposes of this section, a disqualifying event in respect of a qualifying business transfer occurs at the earliest of

  • (a) the time when the trust that participated in the qualifying business transfer ceases to be an employee ownership trust, and

  • (b) the time that is the beginning of the taxation year of a qualifying business of the trust in which less than 50% of the fair market value of the shares of the qualifying business is attributable to assets used principally in an active business carried on by one or more qualifying businesses controlled by the trust at both that time and at the beginning of the preceding taxation year of the qualifying business.

• Marginal note:Consequences of a disqualifying event

  (4) If a disqualifying event in respect of a qualifying business transfer occurs

  • (a) within 24 months of the disposition time for the qualifying business transfer, subsection (2) is deemed to have never applied in respect of the subject shares disposed of under the qualifying business transfer; or

  • (b) any time after the day that is 24 months after the disposition time for the qualifying business transfer, in computing the income of the trust that participated in the qualifying business transfer, the trust is deemed to have a gain equal to the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e), for the year in which the disqualifying event occurs, from the disposition of a capital property.

• Marginal note:Anti-avoidance

  (5) Despite any other provision in this section, subsection (2) does not apply in respect of a qualifying business transfer if it is reasonable to consider that one of the purposes of any transaction (as defined in subsection 245(1)), or series of transactions, is to

  • (a) involve the trust (or the purchaser corporation) in the qualifying business transfer to accommodate the direct or indirect acquisition of subject shares (or the acquisition of all or substantially all of the risk of loss and opportunity for gain or profit in respect of the subject shares) by another person or partnership (other than the trust or the purchaser corporation) in a manner that permits an individual to claim a deduction under subsection (2) that would otherwise not be available; or

  • (b) organize or reorganize a subject corporation or any other corporation, partnership or trust in a manner that allows a deduction to be claimed under subsection (2) in respect of more than one qualifying business transfer of a business that is relevant to the determination of whether subject shares satisfied the condition set out in paragraph (a) of the definition qualifying business transfer in subsection 248(1).

• Marginal note:Failure to report capital gain

  (6) Despite subsection (2), no amount may be deducted under this section in respect of a capital gain of an individual for a particular taxation year in computing the individual’s taxable income for the particular taxation year or any subsequent year, if

  • (a) the individual knowingly or under circumstances amounting to gross negligence

    • (i) fails to file the individual’s return of income for the particular taxation year within one year after the taxpayer’s filing-due date for the particular taxation year, or

    • (ii) fails to report the capital gain in the individual’s return of income for the particular taxation year; and

  • (b) the Minister establishes the facts justifying the denial of such an amount under this section.

• Marginal note:Deduction not permitted

  (7) Despite subsection (2), no amount may be deducted under this section in computing an individual’s taxable income for a taxation year in respect of a capital gain of the individual for the taxation year if the capital gain is from a disposition of property which disposition is part of a series of transactions or events

  • (a) that includes a dividend received by a corporation to which dividend subsection 55(2) does not apply but would apply if this Act were read without reference to paragraph 55(3)(b); or

  • (b) in which any property is acquired by a corporation or partnership for consideration that is significantly less than the fair market value of the property at the time of acquisition (other than an acquisition as the result of an amalgamation or merger of corporations or the winding-up of a corporation or partnership or a distribution of property of a trust in satisfaction of all or part of a corporation’s capital interest in the trust).

• Marginal note:Deduction not permitted

  (8) Despite subsection (2), if an individual has a capital gain for a taxation year from the disposition of a property and it can reasonably be concluded, having regard to all the circumstances, that a significant part of the capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share within the meaning of subsection 110.6(8)) or that dividends paid on such a share in the taxation year or in any preceding taxation year were less than 90% of the average annual rate of return on that share for that year, no amount in respect of that capital gain shall be deducted under this section in computing the individual’s taxable income for the year.

• Marginal note:Average annual rate of return

  (9) For the purpose of subsection (8), the average annual rate of return on a share (other than a prescribed share within the meaning of subsection 110.6(8)) of a corporation for a taxation year is the annual rate of return by way of dividends that a knowledgeable and prudent investor who purchased the share on the day it was issued would expect to receive in that year, other than the first year after the issue, in respect of the share if

  • (a) there was no delay or postponement of the payment of dividends and no failure to pay dividends in respect of the share;

  • (b) there was no variation from year to year in the amount of dividends payable in respect of the share (other than where the amount of dividends payable is expressed as an invariant percentage of or by reference to an invariant difference between the dividend expressed as a rate of interest and a generally quoted market interest rate); and

  • (c) the proceeds to be received by the investor on the disposition of the share are the same amount the corporation received as consideration on the issue of the share.

• Marginal note:Deduction not permitted

  (10) If it is reasonable to consider that one of the main reasons for an individual acquiring, holding or having an interest in a partnership or trust (other than an interest in a personal trust) or for the existence of any terms, conditions, rights or other attributes of the interest is to enable the individual to receive or have allocated to the individual a percentage of any capital gain or taxable capital gain of the partnership or trust that is larger than the individual’s percentage of the income of the partnership or trust, as the case may be, despite any other provision of this Act, no amount may be deducted under subsection (2) by the individual in respect of any such gain allocated or distributed to the individual.

• Marginal note:Related persons, etc.

  (11) For the purposes of this section,

  • (a) a taxpayer shall be deemed to have disposed of shares that are identical properties in the order in which the taxpayer acquired them;

  • (b) a personal trust shall be deemed

    • (i) to be related to a person or partnership for any period throughout which the person or partnership was a beneficiary of the trust, and

    • (ii) in respect of shares of the capital stock of a corporation, to be related to the person from whom it acquired those shares if, at the time the trust disposed of the shares, all of the beneficiaries (other than registered charities) of the trust were related to that person or would have been so related if that person were living at that time;

  • (c) a partnership shall be deemed to be related to a person for any period throughout which the person was a member of the partnership;

  • (d) a person who is a member of a partnership that is a member of another partnership is deemed to be a member of the other partnership;

  • (e) if a corporation acquires shares of a class of the capital stock of another corporation from any person, it shall be deemed in respect of those shares to be related to the person if all or substantially all the consideration received by that person from the corporation in respect of those shares was common shares of the capital stock of the corporation; and

  • (f) shares issued by a corporation to a particular person or partnership shall be deemed to have been owned immediately before their issue by a person who was not related to the particular person or partnership unless the shares were issued

    • (i) as consideration for other shares,

    • (ii) as part of a transaction or series of transactions in which the person or partnership disposed of property to the corporation that consisted of

      • (A) all or substantially all the assets used in an active business carried on by that person or the members of that partnership, or

      • (B) an interest in a partnership all or substantially all the assets of which were used in an active business carried on by the members of the partnership, or

    • (iii) as payment of a stock dividend.