A: -Assuming she would otherwise qualify for the capital gains exemption if she were to sell to an arm's length person, (i.e. CNIL, residency, and all the other anti avoidance rules have been met) yes she can claim the capital gains exemption. However, she cannot sell to her son's corporation (or any other related corporation) and claim the capital gains exemption. Instead a deemed dividend arises equal to the amount of non-share consideration received in respect of her own arm's length ACB, or ACB that has not arisen in respect of a previous transaction where a related person claimed the CGE. Nor can her son transfer the shares to a related corporation and receive non-share consideration in excess of his mother's original ACB. -The concern of the Department of Finance is that owners of private business corporations could use the Small Business Capital gains exemption to extract retained earnings tax-free directly to themselves. One could simply sell his Small Business Corporation to a holding company for a note receivable or VTB, and then use assets of the SBC to repay this note, perhaps by amalgamating after the sale or just by paying a tax-free inter corporate dividend. This appeared offensive to the Dept of Finance. Someone could effectively access retained earnings tax-free without actually selling the company. Conceivably a $1,000,000 dollar company could be wound-up tax free by a husband/wife. I guess the policy behind the small business capital gains exemption would be violated by such an arrangement. It appears only intended to facilitate arm's length change of business ownership. This is why the anti-avoidance rule (section 84.1) was drafted to include related parties, such as children. Not fair IMHO. >They are preventing something, what is it? >> Nor can her son transfer the shares to a related corporation >> and receive non-share consideration in excess of his >> mother's original ACB. >Same question here? Pretty much the same answer. This version of the anti-avoidance rule in S84.1 catches arrangements where there is no initial sale to a corporation, but someone has claimed the capital gains exemption on an inter-generational or inter-spousal sale of the company. It stops the acquiring spouse/child from accessing internal profits that have been acquired from the parent/other spouse on a tax-free basis. Not really fair, IMHO. It does not apply if the capital gains exemption has not been claimed on the initial sale and full capital gains tax has been paid. In the first scenario, the sale directly to a non-arm's length corporation, the deemed dividend is triggered automatically.