July 9, 2021 by David Christianson
A funny thing happened on the way to the Senate… in June the House of Comments passed a private member’s bill with bi-partisan support, followed shortly thereafter by Senate approval.
The bill then received Royal Assent and became law on June 29.
Even more unusual is that this bill involved the Income Tax Act, the kind that almost always originates with the government.
Bill C-208 An Act to Amend the Income Tax Act was the work of Larry Maguire, Conservative MP for the Brandon Souris constituency in Manitoba. Its purpose was to “establish uniform tax treatment” for the sale of farm and fishing operations whether sold to a family member or not.
Prior to this, farmers, fishers and other small business owners could sell their corporations to an arm’s length third party and receive favourable tax treatment, but they were taxed at a much higher rate if they sold to their own family.
This has resulted in many family farm operations having to be sold outside the family, in order to provide the farmer with enough income on which to retire.
For many years this has seriously challenged the tradition of passing on the family farm. The current rules state that if a farmer or fisher sells the shares of the corporation to a corporation owned by their child, the capital gain is taxed as a dividend under Section 84.1. This increases the tax from about 25% (or zero if the gain qualifies for the $892,218 capital gains exemption on private corporations) and instead is taxed at a rate of about 45%. Both rates depend on the province.
The current federal government has stated this inequity needed fixing but had not done anything about it.
Bill C-208 does not provide a carte blanche tax break, as the selling corporation must still fit the rules of a Qualified Small Business Corporation, a family farm or fishing corporation, the purchasing corporation must be controlled by children or grandchildren who are at least 18, and the seller must have owned the shares for at least 60 months.
That avoids quick flips. The seller will also be required to obtain an independent valuation and the capital gains exemption is reduced if the taxable capital of the seller exceeds $10 million.
Having said all that, some readers of the new law fear it will open the door to some abuse by an unscrupulous business owner. For example, they could create a buyer corporation controlled by the children or grandchildren through voting preferred shares, but with some or all the common equity (the true ownership) still in the hands of the parent. This might pass the control test and thereby get the better tax treatment, without a genuine transfer of ownership.
Unfortunately, a prediction that Carmen lawyer Mona Brown made in June when we were discussing this bill has also come to pass. That is the prediction that the Department of Finance would attempt to change the law. On June 30, they announced they would introduce legislation to delay the implementation of the new law from June 29, 2021 to January 1, 2022. They also hinted at retroactive measures, making any planning by taxpayers at this point very risky.
Ms Brown said this week, “It is so unfortunate that Finance is trying to defeat the will of our elected representatives. The bill already has adequate protection with the requirement to hold the shares for five years and the requirement to obtain an independent valuation. I do not see why Finance is messing with the will of Parliament!”
I worked for a year at the House of Commons writing speeches for an MP, and my clear recollection from that time is that Parliament makes laws and the civil service carries them out, not the reverse.
Although the Prime Minister’s office and cabinet appeared to be against Bill C-208 and tried to get some of their Senators to amend the bill to stop its passing, the ship of democracy has sailed, with 17 Liberals voting in favour.
It would be shameful for a democratically enacted law that fixes a discriminatory aspect of the Income Tax Act to be reversed after becoming law. If the government really wants to continue this discrimination, they should have the courage to introduce a bill themselves that would make their intentions clear, not try to repeal it through the back door.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Senior Wealth Advisor & Portfolio Manager with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.