On March 26, Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025 (“Bill C-15”) received Royal Assent, enacting long-anticipated amendments to section 44.1 of the Income Tax Act (the “Act”). The amendments substantially broaden access to the capital gains deferral available under section 44.1 and apply to qualifying dispositions that occur on or after January 1, 2025. Section 44.1 provides a limited capital gains deferral where a natural person sells shares of a qualifying corporation and reinvests the proceeds in shares of another qualifying corporation. While the definition is complex, qualifying corporations are generally corporations that carry on active business or hold shares in such active business corporations.
Background
The expansion of the section 44.1 regime was first announced in the 2024 Fall Economic Statement, which acknowledged that the rollover available for eligible small business corporation (“ESBC”) shares was rarely used in practice due to restrictive eligibility criteria, including limitations on the types of shares that could qualify, relatively small asset thresholds, and a short reinvestment period.
Draft legislative amendments were released in August 2025, and those proposals have now been implemented through Bill C-15. The stated objective of the amendments is to encourage continued investment in active Canadian businesses by making the deferral more accessible while retaining existing safeguards.
Overview of Section 44.1 Mechanics
Section 44.1 applies where an individual makes a qualifying disposition of shares of a corporation. Very generally, a qualifying disposition is a disposition of shares that are ESBC shares of the individual, that are shares of an active business corporation throughout the period the individual owned them, and that were owned by the individual for at least 185 days before disposition. Additional conditions apply to ensure that the relevant active business was carried on primarily in Canada during the relevant period.
For these purposes, an ESBC is, subject to certain exclusions, a Canadian-controlled private corporation whose value is derived almost entirely from operating an active business in Canada. In practical terms, this usually means that all or substantially all of the corporation’s assets must consist of property used mainly in a Canadian active business, or shares or loans of related Canadian operating companies, or a combination of those types of assets.
Where a qualifying disposition occurs, subsection 44.1(2) limits the individual’s capital gain for the year to the amount of the gain otherwise determined minus the individual’s “permitted deferral”. The permitted deferral is determined by a statutory formula that effectively defers the portion of the gain that corresponds to the portion of the proceeds of disposition that are reinvested in “replacement shares”. The deferred amount is not forgiven. Instead, it is preserved through a reduction to the adjusted cost base (“ACB”) of the replacement shares and will generally be realized when those shares are subsequently disposed of.
What has Changed under Bill C-15
The most significant change is the removal of the historic “common share” restriction. Under the prior rules, an ESBC share generally had to be a common share, as that term is used in paragraph 110(1)(d) and imported the stock option regime. Bill C-15 repeals that requirement, such that any type of share of an ESBC, like preferred shares, can qualify.
Bill C-15 also increases the maximum carrying value of assets that a corporation (together with related corporations) may have and still qualify as an ESBC, from $50 million to $100 million, determined immediately before and after the issuance of the share. The Act continues to define “carrying value” by reference to amounts reflected on the corporation’s balance sheet, with shares of, and debts owing by, related corporations deemed to have a carrying value of nil.
In addition, the amendments extend the period in which replacement shares may be acquired. A replacement share may now be acquired by the individual in the year of disposition or in the following calendar year, rather than within 120 days after the end of the year of disposition. This change provides materially more flexibility for taxpayers to identify and complete a qualifying reinvestment.
Requirements and Practical Considerations
Although section 44.1 has been liberalized, it remains highly technical. The deferral is available only to individuals (other than trusts), and only where the disposed shares and the replacement shares each satisfy detailed statutory definitions. The replacement shares must generally be issued from treasury by the issuing corporation, such that shares acquired from existing shareholders will not qualify.
Importantly, the deferral is not automatic. The individual must designate the replacement shares as replacement shares in the individual’s return of income for the year of disposition. Where replacement shares are acquired in the calendar year following the disposition, this may require careful attention to filing mechanics, including whether an amended return or late designation is necessary.
The amount of the deferral is proportionate. A full deferral is available only where all proceeds of disposition are reinvested in replacement shares. Where only part of the proceeds are reinvested, only the corresponding portion of the capital gain may be deferred, with the deferred amount reducing the ACB of the replacement shares on a pro rata basis.
Section 44.1 also contains continuity rules that preserve eligibility in common situations such as transfers on death, marital or common-law breakdowns, and certain share-for-share exchanges carried out on a tax-deferred basis. Finally, a specific anti-avoidance rule may deny the permitted deferral altogether where one of the main purposes of a transaction or series of transactions is to obtain an excessive deferral, and the general anti-avoidance rule remains applicable in appropriate cases.
Takeaways
With Bill C-15 now in force, section 44.1 is no longer confined to a narrow and largely theoretical set of circumstances. The removal of the common-share restriction, the increased asset threshold, and the extended reinvestment period together make the deferral a more realistic planning option for Canadian entrepreneurs reinvesting in active Canadian businesses. At the same time, the provision remains unforgiving, and careful attention to the statutory requirements, particularly timing and designation, is essential.