Qualified small business corporation shares are disposed of by the taxpayer to a child for FMV proceeds during the taxpayer’s lifetime or on death for deemed FMV proceeds. Can the capital gains deduction be claimed? CRA responded:
In both of the situations … you would generally be able to deduct an amount as a capital gains deduction … as long as all the conditions and limitations in subsection 110.6(2.1) are satisfied. The fact that you dispose of the shares of the particular corporation to an individual with whom you do not deal at arm's length should generally not prevent you from deducting an amount under subsection 110.6(2.1).
… [I]n both of these situations, subparagraph 84.1(2)(a.1)(ii) could apply for the purposes of section 84.1 to reduce the adjusted cost base of the shares acquired by your child.