Bill C-208 needs amendments: Grits

Law to reduce tax burden for family-business transfers may have created unintentional loopholes, says Finance Minister

The tax on transferring a family-owned business went down June 30 when Bill C-208 became law.

That might not last.

The Liberal government is already proposing changes. The legislation, introduced in the House of Commons earlier this year by Manitoba Conservative MP Larry Mcguire, makes it easier for a fish harvester or farmer to pass the business along to the next generation by reducing the taxes paid on the transaction.

Testifying before a parliamentary standing committee earlier this year, Maguire explained that when a family member sells a business to another family member, the difference between the sale price and the original price is considered a dividend.

However, if they sell the business to a stranger the difference is considered a capital gain.

A capital gain is taxed at a lower rate, and the seller can use his or her lifetime capital gains tax exemption to reduce the tax paid even further.

Maguire used the example of the sale of a farm worth $1 million.

Selling to a stranger would be considered a capital gain and the farmer would pay tax of 13.39 per cent on any increase in the farm's value since he first acquired it. If the farmer sold it to a child or grandchild the gain in value would be considered a dividend and taxed at a rate of 47.4 percent, Maguire said.

The Bill cleared committee stage and third reading in the House of Commons in May, was adopted by the Senate in June and received Royal Assent on June 20.

But a June 30 press release from the Department of Finance created some confusion, stating the bill makes amendments to the Income Tax Act but does not include an application date.

In that press release the department indicated the federal government proposed to introduce legislation to clarify that the amendments would apply at the beginning of the new taxation year starting Jan. 1, 2022.

Nearly three weeks later, on July 19, Chrystia Freeland, Deputy Prime Minister and Minister of Finance, issued another press release confirming that the legislative changes in Bill C-208 were now law.

According to a report in The Western Investor, Freeland had overruled the June 30 decision and press release by Finance Department officials, stating, “The law is the law” and all aspects of Bill C-208 were now in effect.

However, in her press release Freeland also said the bill may have inadvertently created the loophole to allow “surplus stripping.” That's where dividends are converted to capital gains to take advantage of the lower tax rate, without any genuine transfer of the business actually taking place.

That would compromise the integrity of Canada's taxation system, Freeland said.

The Liberal government, therefore, intends to introduce draft legislative amendments for consultation.

“The amendments we intend to bring will honour the law passed by Parliament, make sure everyone pays their fair share, and support the families and small businesses that keep our economy, and our communities, strong,” Freeland said in a news release.

According to the Finance Department, the amendments would address some of the following issues:

• The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;

• The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;

• The requirements and timeline for the parent to transition their involvement in the business to the next generation; and

• The level of involvement of the child or grandchild in the business after the transfer.

Dan Kelly, president of the Canadian Federation of Independendent Business (CFIB) has indicated publicly he is wary of more finagling with the law. CFIB has been lobbying for years for changes to the tax laws on this issue.

Kelly told trade publication Advisor's Edge he has no issue with the Finance Department wanting to ensure the rules protect the integrity of the tax system but said that should have been done while the bill was making its way through the Parliamentary process.

“This [delay] seems like an attempt to just kick the can forward hoping that everyone will forget that Parliament has passed a piece of legislation — and that it'll get lost after a [possible] election campaign this fall.”

The press releases from the Finance department also prompted another politician to weigh in.

Pamela Wallin, who was appointed to the Senate in 2009 by former Conservative Prime Minister Stephen Harper but now sits as an Independent Senator, alleged in a tweet on July 20, that the Liberal government “tried to undo it's bizarre attempt to rescind a law that passed both houses!”

“Stay tuned,” she tweeted.

FILE Family-owned farms and fishing enterprises are not the only companies that will benefit from the new tax laws. The rules apply to all family-owned businesses, and that’s where the Liberals are seeing some loopholes.

FILE Bill C-208 introduced changes to reduce the tax burden for family-owned businesses that want to transfer ownership to their children.

File Deputy Prime Minister and Finance Minister Chrystia Freedland •