THE STANDING SENATE COMMITTEE ON AGRICULTURE AND FORESTRY
EVIDENCE
OTTAWA, Thursday, June 3, 2021
The Standing Senate Committee on Agriculture and Forestry met by videoconference this day at 9 a.m. [ET] in consideration of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
Senator Diane F. Griffin (Chair) in the chair.
[English]
The Chair: Honourable senators, welcome to this public meeting of the Standing Senate Committee on Agriculture and Forestry. I am Diane Griffin, a senator from Prince Edward Island, and I have the pleasure of chairing this committee.
Before we begin, I would like to remind senators and witnesses to keep their microphone muted at all times, unless recognized by name by the chair, and avoid switching from one language to the other in the same intervention. Before speaking, please wait until you are recognized. I will ask senators to use the raise hand feature.
Should any technical challenges arise, particularly in relation to interpretation, please signal this to the chair or the clerk. If you experience other technical challenges, please contact the ISD service desk. Please note that we may need to suspend during these times to ensure that all members are able to participate fully.
Finally, I would like to remind all participants that Zoom screens should not be copied, recorded or photographed. You may use and share official proceedings posted on the SenVu website for that purpose.
With all of that said, good morning and welcome to today’s meeting. I would now like to introduce the members of the committee who are participating in this meeting: Senator Deacon (Nova Scotia), deputy chair of the committee; Senator Oh, deputy chair of the committee; Senator Mercer, fourth member of the steering committee; Senator Black (Ontario); Senator Forest, critic of the bill; Senator Hartling; Senator Mégie; and Senator Petitclerc.
Before getting started with our witness panel, I would like to ask the committee’s permission to propose the following routine motion. Is it agreed that, for the duration of the session, two staff members for the chair and one staff member for each committee member present to be allowed access to in camera meetings held by videoconference?
Some Hon. Senators: Agreed.
The Chair: Okay, carried. Thank you, folks.
Today, we have the pleasure of hearing witnesses regarding Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
I am asking senators and witnesses to keep their interventions brief to ensure that every member can at least get one question in during the short time that we have. If time permits, we can proceed with a second round of questions.
With that in mind, we welcome Mr. Larry Maguire, Member of Parliament, the sponsor of the bill. He will be given five minutes for his opening remarks and senators will be given two minutes each for questions in the first round.
Mr. Maguire, on behalf of the committee, I would like to thank you for appearing. The floor is now yours.
Larry Maguire, Member of Parliament for Brandon—Souris, Manitoba: Thanks very much, Madam Chair. It is a pleasure for me to appear here this morning before your Agriculture Committee on Bill C-208.
Before I begin my remarks, I want to thank the Senate for quickly passing this legislation at second reading and referring it to this committee. I want to personally thank you, Senator Griffin, for agreeing to sponsor the legislation and to Senator Forest for speaking at second reading as well.
The purpose of the bill is pretty straightforward: It would level the playing field by giving families the exact same tax treatment if they transfer their business or operation to their children as if they transferred it to a stranger.
As you know, there are currently two sets of rules. In some cases, it would result in the difference of hundreds of thousands of dollars in that sale. For some, that might not seem like a lot, but in many cases, it can result in a parent making the tough decision to sell their business to a stranger rather than to their own children or grandchildren.
Bill C-208 would allow qualifying small businesses, farm families and family fishing corporations the same tax rate when selling their operation to a family member as they would if they sold it to a third party. Currently, when a person sells their small business to a family member, the difference between the sale and the original purchase price is considered a dividend. However, if the business is sold to a non-family member, the sale is considered a capital gain. A capital gain is taxed at a much lower rate and allows the seller to make use of the lifetime capital gains exemption.
The passage of Bill C-208 will result in the sale of more locally owned and operated businesses that we have in our jurisdictions. These are the types of businesses that are deeply involved in our communities and provide steady employment for countless individuals. It will help keep farms and fishing operations in the family. Bill C-208 sends a message of hope to young farmers who want to carry on what their family started.
Most of all, it will bring tax fairness to the Income Tax Act. No longer will parents be given a false choice of having to choose between a larger retirement package by selling to a stranger or a massive tax bill because they sold to a family member, their own child or grandchild. Every community in Canada will be positively impacted with the passage of this bill.
There is non-partisan support for this legislation. Before Bill C-208 was referred to the House of Commons Finance Committee, it only received two Liberal MPs supporting it. But after the Finance Committee conducted its study and spoke to tax experts and Finance Canada officials, 19 Liberal MPs voted in favour of this legislation at third reading as well. I would be remiss not to point out that the Liberal chair of the Finance Committee voted in favour of this bill at third reading, and he also participated in the debate and urged others to support this legislation. I thank him again.
I’ve spoken to countless stakeholders, tax experts and family‑run businesses about this legislation, and I am pleased to report there is almost unanimous support for Bill C-208. We know what the bill will cost due to the Parliamentary Budget Officer’s analysis. We know there are safeguards built into the legislation to ensure people don’t skirt tax rules. We know the bill is squarely focused on small businesses. We know the legislation, as drafted, will achieve its intended aim, which is to level the playing field by scrapping the differences between the two sets of tax rules.
Since the legislation passed third reading in the House of Commons, not a day goes by without someone reaching out to my office and asking when it will be proclaimed into law. There are numerous families who are ready to transfer their businesses to their children or grandchildren but don’t want to pay the unfair tax rate. Once and for all, we can finally resolve this long‑standing problem that countless families have had to endure when selling their business or operation to their own children.
With that, I look forward to your questions, senators. I thank you all once again for dealing with this legislation in a timely manner.
The Chair: Thank you very much for your presentation, Mr. Maguire.
I will now open up the floor to questions. I will start with the deputy chairs and then I’ll move on in alphabetical order to the rest of the senators. When we have our next witness, the alphabetical order will reverse and go in the other direction. Okay?
With that, Senator Oh, you are the first person to ask a question if you care to.
Senator Oh: MP Maguire, this is wonderful. What you are doing is actually helping out small businesses, especially family‑run businesses in Canada, and that’s good. My question for you is this: What are the expected short-, medium- and long‑term impacts of Bill C-208 on the Canadian agriculture and — I suppose it’s the same thing — fishery sectors?
Mr. Maguire: The long-term impact, Senator Oh, is that people will be able to have pride in having their industry or small business, which they started, continue in the same family membership. There is pride in that. But apart from that, these dollars stay in the community instead of being taxed and going into general revenue for the country. By making this tax change and levelling the playing field, we don’t have to help these families in the future. No one is getting an advantage here. It is just levelling the playing field to allow them to be able to use that capital gains exemption as well. Therefore, the families don’t usually move very far away when the next generation takes over. There are usually some grandchildren involved, perhaps, and those dollars stay in that local community. That’s very important in supporting them as well.
According to the Canadian Federation of Independent Business — you may hear it later when witnesses are here — roughly half of the small businesses in Canada would choose to transfer their small businesses to a family member. I think that is a really significant opportunity for employment, never mind the fact that it stays in the family.
Senator Oh: Do you have any idea of the impact on revenue to the government? I suppose your study would also say the most important thing is to have the next generation carry on the family business — to promote the small businesses. What about the revenue side? Any idea?
Mr. Maguire: Yes, I spoke to the Parliamentary Budget Officer. They’ve done a study on this, as has the Library of Parliament. They indicated that the change would be from $178 million to $300 million on an annual basis, depending on how many businesses were transferred, which is opposed to the $1.2 billion talked about earlier in previous iterations of this bill before Parliament. That would have meant that all the businesses would have had to have been sold at once. That doesn’t happen. There are only a certain percentage of sales every year that would take place, so it is between $178 million and $300 million.
Senator Oh: Thank you, Mr. Maguire. I will leave some questions to other members. Thank you.
Senator C. Deacon: Thank you, MP Maguire, for being here. I spent several years in your part of the world, in the late 1970s, in the Deloraine, Manitoba area and in your riding. I know it and have fond memories of that part of Manitoba.
I am wanting to get at the understanding of why people are against this in Finance Canada. Fairness in our tax system is such a central principle, and I know that there are many areas that lack fairness. One concern was raised to me. I’d just like to hear what concerns have been raised to you because I am struggling to get to the bottom of them. One of them is that this could be used as just a mechanism to flip a farm or fishing operation and avoid taxes. I am struggling with it, so I’m hoping to get some help as to why there have been criticisms. We’re going to hear from department officials, but I would just like to make sure we hear your side of whatever arguments they are bringing forward because I have not been able to get to the bottom of it.
I want to thank you, again, for your work in this regard. We need young families — descendants of farmers — to be encouraged to take over family operations. It is essential. We’ve got to inspire young people to get into farming. It is central, so I just want to thank you for your work.
The Chair: Before you answer, Mr. Maguire, I think Senator Deacon used most of his two minutes, but please go ahead and give us a fairly concise answer, please.
Mr. Maguire: Thank you for your comments, Senator Deacon. I couldn’t agree more in regards to the need for agriculture, but this bill is about all small businesses. It will help the farming sector and fishing, but also all small businesses, whether you’re running a bakery, a dress shop, a jewelry store — even the insurance agencies in Canada. Life Underwriters Association is one of the supporters, as well as the Insurance Brokers Association of Canada. There have been discussions, like “Well, we can’t allow wealthy people to get through loopholes in the taxes.” That’s one of the things that I heard from the House. This is, number one, about small businesses. If you are a large business, this does not apply to you. Even what we call a medium-sized business today probably won’t qualify for this, and it has to be qualifying shares of a family-owned corporation as well.
You heard the numbers that I used in regards to how this would impact Canadian tax revenue of the country. A dollar always seems like a lot to me, but in the scope of the budget of the federal government this is not a big expense. However, what we fail to realize is that these dollars do stay in those communities, it does help them grow and it keeps these people in the industry that they are already in, whether they are in a small community like Deloraine or Toronto. I think that’s pretty important.
That’s the only real issue that we hear against this bill, but it can be taken care of by the safeguards that have been built into the bill. If you don’t hold these shares for five years, then you have to go back and pay the taxes anyway.
Senator R. Black: Thank you and good morning, Mr. Maguire, and thank you for joining us today. As you know, my background is in agriculture and rural affairs. I would first like to commend you for the work you have done. I know this is going to make a huge difference, in my case, to agriculture, family farms and rural communities.
With that in mind, I would like to hear your thoughts on any impacts that we can expect, as a result of the passage of this bill, on Canada’s rural communities. I’d like to get that on the record — your thoughts on the impacts on Canada’s rural communities. Thank you.
Mr. Maguire: Thanks very much, Senator Black. I know there will be other witnesses as well. The Canadian Federation of Independent Business and the Canadian Federation of Agriculture are speaking to you today as well. Mr. Janzen will probably be able to answer the question Senator Deacon asked of me even better than I just did in regards to the changes in the tax requirements here.
Senator Black, the biggest thing here is that it leaves these dollars in the local communities, and it helps the transfer. I grew up on a farm. I know how much — I won’t say slave labour — cheap labour my father got out of me before I started buying the operation from him. I know how much of that free labour I basically — if you want to put it that way — with his involvement in the industry, got back from him in his retirement years. He didn’t go very far, believe me. He did a little bit of travelling, but when the season came around to farm, he was right there.
I think it’s a great way to tie the family farms together and keep small businesses. I don’t care whether it’s a dress shop or a bakery on a corner. There are big benefits in being able to keep families together, which keeps communities together. As I say, I don’t care whether it’s the type of farm or community that Senator Deacon indicated — by the way, I’ll say hello to the Franklins and the Caldwells and everybody down there for you, too — or if it’s in Toronto. I think that’s important. You know, Mr. Black, my father had a saying: If you look after the land, it will look after you.
I think you and I have talked about the soil study that you wanted to do. I was there when Senator Sparrow did the one that you are going to replace from 30 or 40 years ago. I appreciate the fact that if you know the land, you will look after it better.
[Translation]
Senator Forest: Kudos to you on this bill, Mr. Maguire. You picked up the torch from Guy Caron, the former member for Rimouski, who had brought forward similar legislation.
One of my concerns has to do with the transfer of fishing and farm businesses to non-family members. It’s fundamentally unfair. According to my values, the government has a duty to ensure the basic fairness of measures.
In many cases, farmers decide to break up their farms, selling off their quotas, buildings and equipment. Not only does the money leave the local community, but the fabric of Canada’s regional farms is undermined.
Have you been able to evaluate that? As a follow-up, I’d like to know whether, as part of your examination, you looked into the tax rules other jurisdictions or countries apply in similar situations.
[English]
Mr. Maguire: That’s a very good question, senator. In regard to other countries, I go back to 1986 when I was in Kansas and the first U.S. farm bill was put in place. The Americans have had their own agricultural platforms and programs for support for their industries over the years as well. I’m not familiar with what they have in regard to this type of specific legislation in Canada. I’ve been solely focused on our own situation here. You are right. Guy Caron was the former NDP interim leader, and he did bring this bill forward. It is exactly the same words as he put in place. I spoke to the Parliamentary Budget Officer and the Library of Parliament to see if there were any amendments that we might need to put in it, and their indication was that there was nothing else needed. Any changes, once the bill was put into regulations, could be dealt with at that time and there were no foreseeable obstacles to putting this bill in place. I think that’s one of the key issues that I was concerned about.
It also goes back to Emmanuel Debourg. There were four of us elected in a by-election in the fall of 2013: Emmanuel Debourg, a Liberal from Montreal; myself; Ted Falk, another Conservative from southeastern Manitoba; and a young lady named Chrystia Freeland, who is now our finance minister. Mr. Debourg also brought this bill forward at one time in 2015, but it died because the election was called. That’s why I am asking for support from the Senate to pass this bill at third reading as quickly as possible once you’ve heard the witnesses. There is a looming election possibility with a minority government at any time, and this is an opportunity to put this bill into legislation. Thank you.
Senator Hartling: Thank you to Mr. Maguire for bringing this bill forward. It seems like a really practical bill that should help a lot of Canadians. I’m from New Brunswick, which is very rural and also has a lot of fishing, farming and that sort of thing to run our economy. I am wondering, in the work you have done on this bill, have you had any feedback from Atlantic Canada on how this might impact Atlantic Canadians? Is it something that they support? I am curious about keeping it in the family. Will that encourage younger people to actually be involved in these kinds of industries? Thank you.
Mr. Maguire: Thank you, Senator Hartling, we are certainly encouraged by the support we have received from across Canada, including the fishing industry on both coasts. And inland fishing, with Lake Winnipeg here in Manitoba, of course.
It does keep the family involved because several hundred thousand dollars is usually the retirement package for the family who is selling the family farming operation, the fishing operation or the corner store. I believe that is a benefit to the Canadian government because, of course, we don’t have to worry about their retirement packages. It also helps keep continuity in our industries and support for the business that we have in the country. The government basically then knows that they have a continuation of tax revenue coming in from those small businesses and that they are being managed in a forthright and fair manner.
So, to answer your question, yes, there has been lots of support in those industries. People say, “Fishing, oh, what do you have involved?” Well, we know the ships that are involved. These are not boats. They are ships that are involved in the fishing industry and they are very expensive.
Senator Hartling: Thank you very much.
[Translation]
Senator Mégie: I’d like to thank the witness for providing this information. My understanding from one of our discussions on the bill is that, sometimes, when a business owner wants to pass the torch to a family member, they set their price, and afterwards, civil servants can challenge the price on the grounds that it is too high — as though the parties were trying to defraud the system.
That made me wonder whether assessors specializing in these types of businesses exist, similar to real estate — people who could determine the business’s value before it’s sold. That would save the seller problems, whether the purchaser was an unrelated party or a family member.
[English]
Mr. Maguire: Yes, they most certainly are, Senator Mégie. Thank you very much for the important question. Even back in the day when I purchased the operation — in fact, even at the time of my father’s passing — there were rules around the allowances that can be used for deeming the value of a property. Particularly in this case, farmland, and that is the case for small businesses. It works both ways. It is not that you could set that price too low, but it is also that you cannot take advantage of setting it higher than you might want it to be to take into consideration benefits that might be gained further down the road from a higher sale price, like not having to pay as much tax if you set it higher now and sell it 20 years later. There are rules around that. You do have to declare a value and it has to be seen as reasonable for the purchase of these businesses.
[Translation]
Senator Mégie: If there are special assessors, why do people have reservations about the bill? The assessor could simply appraise the value of the business and set the price.
[English]
Mr. Maguire: Thank you. I don’t think it is that they are worried about the price as much as the transaction may be just a paper transaction and that the money does not actually flow from one generation to another. That’s why the safeguards are built in that you have to keep the shares for five years unless there is a death that occurs by the purchaser for that five-year period. That’s what I mean by safeguards being built into this bill. Mr. Caron was very clear in building those into the bill in the first place.
Senator Mercer: Thank you, Mr. Maguire, for your efforts on this bill. This is an important bill. I have been on this committee for 18 years and I have seen every iteration of this bill and this is the closest we’ve come. You’ve done a good job to getting us to the finish.
I have a lot of questions, but not a lot for you. My concern is that all of these people who are very concerned about the amount of money that’s not going to go to the treasury because of this change. Do we have any safeguards built in that would allow us to review the effect on the treasury?
You’re absolutely correct. If everyone sold their property in one year, it would be a pretty big hit. Has anyone done that analysis over a longer period of time?
Mr. Maguire: Thanks very much, Senator Mercer. I think the biggest safeguard against that is Canada Revenue Agency, or CRA, can audit anybody at any time. There is nothing in this bill that stops the CRA from doing the audits they would do in the normal course of business anyway.
As far as the determination of the overall values impacting the treasury, you’re quite right in your assessment of that as well. The assessment was done by the Parliamentary Budget Officer as I put forward. It’s the only one I called for, and it’s the same one that Guy Caron called for. The Parliamentary Budget Officers were very clear in their analysis, and they maybe used some of the Canadian Federation of Independent Business analysis itself. There is a cap on a small business. Once you hit the $10 million mark, this is reduced down to nothing by $15 million anyway, and anything over that does not qualify a corporation under the definition of small.
I don’t know if that answers your question clearly, but if you need any more details I’m sure that Mr. Janzen from Deloitte will be able to answer that shortly.
The Chair: Thank you.
Senator Petitclerc: Thank you, MP Maguire, for being here with us. I have a short question and I’m trying to get a sense of the real, concrete impact that this bill could have, specifically on farming. Because when I was researching and preparing for today, I was shocked to read that in my province, in Quebec, we lose one farm a day. That is what I read. In Quebec, the majority of the business buyouts are in rural areas and 44% of small- and medium-sized enterprises belong to entrepreneurs who have taken over a business.
I know one bill cannot fix everything, but do we get a sense of — or do we have numbers or a scenario to know — what kind of a concrete impact this bill could have on that situation?
Mr. Maguire: Yes. Thank you very much, Senator Petitclerc.
There is another impact I didn’t mention earlier. When I was going through agriculture — and as you can tell from the experienced hair up here, it was quite a while ago — there were only a few young ladies in my agriculture class. Today, only 29% of the businesses in Canada, small businesses, are managed and operated by women.
I think this is a tremendous opportunity in agriculture particularly because I see more young women coming back, not just with degrees in agriculture but degrees in management, to run these operations. With a bill like this, there will be a levelling of the playing field between the genders in regard to income because it will encourage more women to stay in the business.
I know in my own little community where I grew up, there were only 400 people and probably only 150 are left in Elgin now. However, there is a strong agricultural area around it here in southwest Manitoba, as there is in all parts of rural Canada. There are great opportunities there for the next generation. We’re seeing a lot of change in that area. It is quite beneficial to those communities to have this put in place.
Senator Petitclerc: Thank you.
The Chair: Thank you, folks. I appreciate everyone’s co‑operation. We’ve done very well time-wise. I would like to thank MP Larry Maguire for being with us today.
We’ll move on to our next witness, Mr. Brian Janzen, who is a senior tax manager at Deloitte.
Brian Janzen, Senior Tax Manager, Deloitte: Thank you for letting me present today. I am a senior tax manager at Deloitte Winnipeg. I have been doing this stuff for 34 years, and we have been waiting thirty-some years for this fix. It’s a fantastic fix. Though, it’s not the be-all and end-all. Personally, I would like to see it applied to a few more corporations, but I’m not going to complain because this is a fantastic start.
My introduction contains a lot of the same stuff that Mr. Maguire said, but I’m going to go through it anyway because it’s important to understand why we’re in this position.
Bill C-208 is going to fix section 84.1 of the Income Tax Act, which was originally introduced as an anti-avoidance section to stop people from stripping cash out of their corporation without paying personal tax by using their capital gains exemption.
Unfortunately, the anti-avoidance provisions caught many valid commercial transactions — sales of small businesses from parents to children or grandchildren. It created an environment where parents had no choice but to sell to a stranger rather than their own children due to the negative tax impact of section 84.1.
The current provisions contain a substantial penalty if a parent sells to their child. In the worst-case scenario, if a person with a farm corporation valued at a million dollars — because of section 84.1 — sells it to an American non-related person, they pay no tax at all. They use their exemption, and they walk away with a million dollars in their jeans. However, if they sell it to their son’s corporation, the potential taxes in Manitoba would be approximately $450,000. That’s a substantial difference in this particular example.
The question I’m hearing is, “Who could possibly be against this?” and I think the people who are against it see this as a loophole benefiting the rich business person or farmer. However, most of these people don’t have a defined pension plan. They don’t have much in the way of RRSPs. Their entire retirement will consist of the sale of the corporation. If they lose almost half of it, it can be devastating.
Bill C-208 goes a long way to correct this anomaly. The provisions of the proposed legislation make sure this only applies to real transfers from one generation to the next and that it only applies to smaller corporations. The five-year time frame ensures that the transfer is a real intergenerational transfer to a child who will carry on the business. Section 84.1 will still catch the abusive transactions that are done solely to extract money out of a corporation.
From my experience over the last 15 to 20 years, that’s Finance Canada’s big concern. They have not been in favour of these fixes because they still think section 84.1 is necessary, and it is necessary, but only to catch what I call the artificial transactions.
The drafts of this bill have been widely circulated among my peers and colleagues across Canada. Everyone is ecstatic. I’ve never seen such unanimous support for a bill. This will provide such a great option to keep businesses in Canada and to keep businesses in the family, if that is the family’s choice. There are enough safeguards to prevent abuse. I’ve spoken with many professionals and business owners across Canada in the last few months and the support for something like this is unanimous. Again, it is not a loophole. It is correcting a tax penalty that has been around too long when a legitimate transfer of business is done within a family.
The Chair: Thank you, Mr. Janzen.
We’re going to move to questions.
Senator Oh: Thank you, Mr. Janzen, for being here with us. My question to you is: To what extent does the deferral of a capital gains tax through intergenerational rollover of family farms in Bill C-208 seek to address?
Mr. Janzen: Sorry, I’m not quite sure I understood the question.
Senator Oh: To what extent does the deferral of a capital gains tax through intergenerational rollover of family farms or fishing corporations address the policy concern of Bill C-208?
Mr. Janzen: There are provisions that allow farms and fishing corporations only, not small businesses, to be transferred from parent to child on a tax-deferred rollover basis. Those are not being addressed by Bill C-208.
Bill C-208 is addressing a fair market sale. For small businesses, farm corporations and fishing corporations, it’s the sale that Bill C-208 is really going to address. It’s not really a deferral, in my mind. It’s a levelling of the playing field so that the tax paid by the seller is the same as it would be if they sold to a third-party stranger.
There still are deferral opportunities that this bill is not touching, but the transfer rollover from parents to child doesn’t provide any retirement package for the parents if there is no price. This allows a fair market commercial transaction to occur, providing retirement savings for mom and dad with the same tax as would happen if they sold to a stranger.
The Chair: Thank you, Mr. Janzen.
Senator C. Deacon: We’re going to be hearing from Finance Canada officials after this meeting today. Any other pushback, any other issues that they may raise that would undermine support for this bill, if you could provide it? You gave a good summary. I’m grateful for it, but anything else you think might be raised, we would love to hear your arguments about those issues. Thank you.
Mr. Janzen: My understanding is that they still feel this is open to abuse. I think they see it as not a legitimate transfer, where dad is going to stay involved in the business and dad is just using the capital gain exemption to strip money out of the corporation. This bill has safeguards to make sure that it is a legitimate transfer, such that the child owns it for at least five years. That was one thing.
The second thing that has been touched upon previously is valuation. In this bill, it says that you have to prove to the minister the value.
One of the senators had asked if there are assessors out there. Every CPA firm has professionals known as chartered business valuators who specialize in the valuation of businesses. We all think it’s important to get that valuation when doing these types of transfers. So there is a safeguard that the value is correct, that the taxes paid are correct, that it is a legitimate transfer and you’re using legitimate provisions in the act, such as the capital gain exemption, that are available to everybody else.
I wish I could provide more potential arguments, but I just don’t see them. That’s my problem.
The Chair: Thank you, sir.
Senator Petitclerc: My question will continue along the line of Senator Deacon because it is the one little objection for those few who object that this bill is amending two very complex, anti‑avoidance rules in the Income Tax Act. Some have said that because it is complex, we need more debate, more studies and questioning.
You said in your opening remarks that you have consulted with many. Are we ready to move with this bill or do we need more study? Is there more that needs to be uncovered?
Mr. Janzen: I’m sorry, I’m going to be a bit blunt here. This has been studied to death over 25 years. This is a perfect fix for the bill, but there have been previous iterations of this. I’m sorry, I have forgotten the name, but in 2015, there was a Liberal MP who had a very good draft that would have fixed this as well.
This has been around for a long time. This is a very basic bill with very basic, clear safeguards. There is no room for loopholes in this.
All my colleagues across the country have studied it. They love it. They wish it would have a higher threshold for more medium-sized businesses, but it’s a perfect start.
To answer your question, we definitely don’t need any more studies on this. We don’t need any more questions. This is my first opportunity to help with a bill, and I’ve never been so proud to help.
It has to be unanimous. I don’t see how anyone could be opposed to helping small businesses transfer their business to their children. It’s levelling the playing field.
Senator Mercer: Thank you, Mr. Janzen, for being here. I’m going to go to a practical story that I’m familiar with here in Nova Scotia. It’s a good-sized farm. The dad was operating the farm, his children were operating the farm and he’s now retired. This is an actual case where he’s now retired. The farm is now in the children’s hands, but they split the operation. One son has taken the egg side of the farm, which he’s turned into a very profitable operation. The other child has taken the rest of the farm, which includes some dairy quota and some beef.
How does this bill affect them when mom or dad wants to sell the farm to not one child but two children?
Mr. Janzen: This bill is doing two things. There is a separate section that now exempts siblings from the rules in section 55. Section 84.1 is the second-most complicated section of the act, section 55 is the most.
What this bill is doing is enabling that farm to be split into two without immediate tax consequences. Alternatively, if dad were to sell to each child, this bill would also help that.
Without getting into the technical details, because these sections are crazy, this bill will also help split a farm into two so that one child can take the egg and the other child can take the wheat or whatever. So that will help this.
[Translation]
Senator Mégie: I heard you mention real versus artificial transactions earlier. Could you give us an example and explain how you distinguish between a legitimate sale involving a business owner and their son or daughter and an artificial transaction?
[English]
Mr. Janzen: That’s a good question. A real transaction clearly is mom and dad selling to the children and the children taking over the business and carrying on.
When I use the term “artificial,” I’m getting a little bit outside of the real transfer, because what started section 84.1 was practitioners in my field were using the capital gain exemption to do an artificial transfer where you would just sell your corporation to a holding company that you yourself owned, and you would claim the capital gain exemption on that sale and be able to strip out $500,000 or $800,000 tax-free.
That’s what I call an artificial transaction. Section 84.1 will still apply to such a transaction.
In terms of a sale to children, there really is no artificial transaction there. It’s pretty clear. As long as the sale is done, there is nothing to prevent dad from being an adviser and being involved in the business, but the children have to take over the share ownership and they’re the ones who will own it for the next five years. That’s why this bill prevents any artificial type of transaction where it will revert. An artificial transaction is when the business reverts back to dad over a couple of years, just to use up the kids’ exemption. This bill prevents that.
Senator Hartling: This is a question for Mr. Janzen. It’s so nice to see tax people getting excited. Thank you for that. When you’re excited, that’s a good thing and I appreciate that.
With this bill being passed, do you see some other things that could follow this? What would be needed next? This would be one huge step that would fix a big problem. What issues could come from that or follow after this happens?
Mr. Janzen: Oh, I have my druthers. I would like to see a couple of things. Right now, I would like to see this exempt sales from parents to children and grandchildren to apply to sales among brothers and sisters. That would be nice. I would like to see the threshold eventually raised because it doesn’t take long to get to $10 million of taxable capital these days, and then the rules start to not apply to those types of corporations. That can all come in due time.
My view is that the five-year threshold is a little long, but we’re fine with it. In this world, things change quickly. Many of us would like to see it at three years because that’s the bar for a lot of other transactions in the Income Tax Act. However, in the future we would like to see it applied to siblings. That’s where I would like to see this go.
Senator Hartling: Thank you very much.
[Translation]
Senator Forest: I want to start by apologizing to Mr. Maguire and Mr. Janzen. The Canadiens beat the Jets last night, so be careful in the next few games.
Mr. Janzen, the lifetime capital gains exemption is currently $883,384 for a small business and $1 million for a farm or fishing property. You are an accountant, so can you explain the principle of a lifetime capital gains exemption, to help us really understand the difference between that and a dividend, which is taxed at a much higher rate? That information will be helpful as we prepare to meet with officials from the Canada Revenue Agency.
[English]
Mr. Janzen: Yes, an example would be where I just used $1 million for a farm corporation. If you sell your corporation and get the capital gain exemption and it’s a farm corporation and it’s $1 million, it’s still a capital gain and, as long as your farm corporation qualifies, that whole million will be eligible for the capital gains exemption and you will pay no tax.
Just as an aside, you’re probably going to pay a lot of alternative minimum tax, which can be substantial, that you’ll get back over the years. It’s often not totally tax-free, but ultimately it will be.
There are different ways to structure these sales. The worst is if your son sets up a corporation and buys the shares from you, as a mom or dad. Now, all of a sudden, your capital gain gets converted into a dividend by the Income Tax Act and that dividend — I’m using Manitoba rates and we’re pretty well the highest in the country — has a 45% tax rate and it’s fully taxable, not just half like a capital gain. Therefore, as a taxpayer, you want to structure your affairs in the best way. You want it to be a capital gain and you want it to be eligible for the capital gain exemption and it is if you sell it to a stranger.
[Translation]
Senator Forest: The lifetime element comes from the fact that, over time, the more the capital gain increases, the more it is factored in. Is that right?
[English]
Mr. Janzen: Yes, it’s a lifetime item so nobody can get more than $1 million of their gains tax-free. For small businesses, the numbers that aren’t farm corporations, it’s being adjusted for inflation each year. I believe it’s already up to about $860,000. But that’s, again, a lifetime amount. You can only use it once. If you sell your business for $5 million, then $4 million will be subject to capital gains tax. It’s not like these guys are getting away with everything tax-free.
Senator R. Black: Thank you, Mr. Janzen, for being here and for your significant clarity through the examples you provided. They really do make a lot of sense.
In your expert opinion, to what extent would the implementation of Bill C-208 create the opportunity for further unwanted tax avoidance practices?
Mr. Janzen: Are you asking whether this will create more loopholes in tax planning by us tax guys?
Senator R. Black: Yes, thank you.
Mr. Janzen: We don’t see any loopholes. And I would be honest because I’ve spoken with Larry Maguire and his associates throughout this process and if we saw potential loopholes we would have raised them by now because, first of all, we want this to pass. The government has done such a great job over the 30 years of shutting down loopholes and this one does not open up any new ones. Someone, somewhere might find something, but this bill has been in draft form amongst many practitioners and no one has found a loophole yet.
Senator R. Black: Thank you, Mr. Janzen.
The Chair: Thank you, senators, you’ve all been prompt. I greatly appreciate that. And thank you, Mr. Janzen, it was a pleasure to have you with us today. There were great questions and answers.
Honourable senators, we’ve reached the end of our second panel and we’re ready to move on now to our third panel and we have three people on that panel. We have Corinne Pohlmann, Senior Vice President, National Affairs and Partnerships, Canadian Federation of Independent Business; Scott Ross, Assistant Executive Director of the Canadian Federation of Agriculture; and Dr. Rick Williams, Research Director for the Canadian Council of Professional Fish Harvesters.
We have a representative from each of the three parts of this legislation that we’re proposing. Each of these people has been given five minutes for their presentation, and senators will have four minutes each for questions.
Ms. Pohlmann, would you start off, please? The floor is now yours.
Corinne Pohlmann, Senior Vice-President, National Affairs and Partnerships, Canadian Federation of Independent Business: Thank you, chair. Good morning.
Canadian Federation of Independent Business, or CFIB, for those who may not know, is a not-for-profit, non-partisan organization that represents 95,000 small- and medium-sized businesses, which are all independently owned Canadian companies. Our members come from all sectors of the economy and are found in every region of the country.
We focus on three things at CFIB: advocacy, which is where we raise our members’ issues with all levels of government; we provide needed assistance and advice through our helpline and website; and we provide our members with savings on products and services they may need to run their business. We’re also heavily research-based, so we rely on our members’ feedback through our survey processes to guide our policy agenda and I will be sharing some of that with you today.
I want to thank you for the opportunity to be here to share our perspectives on this important bill, Bill C-208, which addresses the unfair tax treatment of small business owners hoping to sell their business to their children.
It is my understanding — and I think it was explained by the previous witness — that when a business owner sells their business to someone unrelated to them, it’s treated as a capital gain and they can then use the lifetime capital gains exemption to maximize the investment, but when it is sold to their children, it is treated as a dividend and therefore taxed at a higher rate as there is no access to the lifetime capital gains exemption.
This issue has been a long-standing one for CFIB as we have supported variations of this bill in previous Parliaments such as when it was introduced by the opposition Liberals in 2015, then again by the NDP in 2017 and, in fact, there was a similar bill by the Bloc Québécois at the same time. The current government even mentioned during consultations to address this issue back in 2017 when other tax changes affecting small businesses were first introduced, but those consultations were never completed. We are hoping this iteration of the bill by the Conservatives will finally bring the changes needed to address this long-standing, unfair tax treatment of small businesses. Given it has been raised over the years by all political parties at some point, we see it clearly has some support from all parties.
First, though, I want to explain why this is important now. I will be referring to some charts that are part of a slide deck that was shared with the clerk prior to the presentation if you would like to take a look at that, if you would like to follow along. On slide 3 of that presentation is basically some data we collected in 2018. We did some work on succession to better understand what the plans of small business owners were at that time. We found that 72% of small business owners planned to exit their business within the next 10 years, which would mean that approximately $1.5 trillion in assets would be transferred from one generation to the next.
On slide 4, you can see that most — 81% — of small business owners were exiting their business to retire, with only 1 in 10 actually planning on moving to another business venture. This is significant because most small business owners actually rely on the proceeds from the sale of their business to help fund their retirement. This is because small business owners do not have pension plans. They may also have very limited RRSPs because many pay themselves in dividends. So the proceeds from the sale of their business often is their retirement plan. So it’s important that they be able to get as much value as they can out of their business in order to be able to have a decent retirement.
On slide 5, you will see that while almost 1 in 2 small business owners hoped to sell their business to someone unrelated to them, 1 in 4 want to sell their business to their children. Bill C-208 would help these businesses keep their business in the family and help make sure they have more of the resources they need to retire comfortably.
There is a quick note in there I wanted to add about a few other interesting findings from our 2018 report that may be of interest to you. We found that half of small business owners actually have no succession plan. Of those that do have a plan, most are informal and likely not as well developed as they could be.
The reason this is important is by having a succession plan they can increase the likelihood of a successful succession process, and it’s something we encourage. The good news, though, is that the closer they are to exiting their business, the more likely they are to have a formal plan, but even then, the majority are relying on an informal plan. We have been working very hard at the organization to provide our members with means to be able to do these succession plans more easily and have them put in writing so it is clear to all involved what the plan is for the business. We have a web hub page that gives information and guidelines and tools for our members to do just that.
Ultimately, though, as you will see on slide 8 if you are able to have the slide deck in front of you, the greatest barrier for business owners looking to exit their business is finding a suitable buyer. This is followed by the challenges of being able to value your business appropriately. Given the fact that finding a buyer is the biggest challenge small businesses face, we want to make sure there are plenty of good options for them. We need to make sure they can also have the opportunity to be able to sell their business to their children. Since so many of them want to sell it to their children, we believe they should be treated no differently than those who want to sell to a third party.
That is why our members strongly support having the transfer of a small business to the owners’ children be given the same tax treatment as that provided to those who want to transfer to a third party. This is clear on slide 9, where you can see that 78% supported having equal tax treatment.
Bill C-208 will finally address this long-standing tax unfairness that requires small business owners to pay more in taxes if they want to sell their business to their children than if they sold it to a third party. This tax change is long overdue. Fixing this unfairness by passing this bill quickly would be a bit of good news in an otherwise challenging and difficult year for so many small business owners. In addition, we would like to see the lifetime capital gains exemption simplified and expanded to include at least some assets — it is currently based only on the shares of a business — and that it be increased to $1 million for all small businesses, not just fishers and farmers.
Thank you for your attention, and I look forward to any questions you may have.
The Chair: Thank you for your presentation. I would now like to move on to Scott Ross and ask him for his presentation.
Scott Ross, Assistant Executive Director, Canadian Federation of Agriculture: Thank you, Madam Chair and committee members, for the opportunity to speak to you today. My name is Scott Ross and I’m the Assistant Executive Director of the Canadian Federation of Agriculture, or CFA. We are Canada’s largest general farm organization, representing nearly 200,000 Canadian farm families from coast to coast to coast. I would like to start by thanking the committee for inviting CFA to speak on Bill C-208 as the facilitation of farm family transfers is of critical importance to CFA and its members.
Agriculture is capital-intensive and succession planning is critical for a sector that will transfer tens of billions of dollars in assets to the next generation in this decade alone. COVID-19 has fundamentally affected Canada and the world’s economic outlook. Canadian agriculture is not immune to this, but the sector is very well positioned to drive Canada’s economic recovery. Yet the average age of Canadian farmers now exceeds 55 and the opportunities these businesses face carry into the next generation.
As a sector where the vast majority of businesses remain family-owned, maintaining the financial health of these businesses across generations is critical. This is in the interest of all Canadians, as studies have shown that family farming encourages sustainable growth, environmental stewardship and increased spending within one’s local community, not to mention its contributions to the social fabric of rural Canada.
On Bill C-208, I would begin by noting that I’m not a tax expert. However, in 2012, I supported a taxation committee at CFA comprised of tax practitioners and farm leaders from across Canada with a mandate to identify and review the most critical tax-related issues facing Canadian farmers. The disincentive section 84.1 presents to family farm transfers — a primary focus of Bill C-208 — was identified as a priority by this committee and has been a focus of the CFA ever since.
This was reiterated when farm leaders from across Canada passed a resolution at CFA’s annual general meeting this year, imploring Parliament to support the passage of Bill C-208 before the next federal election as a priority for Canadian farmers.
Simply put, the current wording of the Income Tax Act penalizes a farmer if they choose to transfer the farm business to a family member as opposed to an anonymous third party. When a retiring farmer sells their businesses to their children, they face the prospect of paying a lot more in taxes than if they were to sell to a stranger. This difference in treatment can amount to hundreds of thousands of dollars. This amounts to reduced productivity, increased financial risk and lost opportunities at a time where the sector holds such immense potential for growth.
There are over 43,000 family farm corporations across Canada, operating on more than 50 million acres of land. The transfer of each one of these businesses, were they to stay in the family, would be disadvantaged and face this undue tax burden.
CFA supports Bill C-208 because it essentially ensures that real family transfers receive the same capital gains treatment as those businesses selling to an unrelated party, rather than treating the difference as a dividend that is taxed at a higher rate and cannot access the lifetime capital gains exemption.
CFA supports the safeguards in Bill C-208 to prevent surplus stripping by assuring that a real transaction has taken place. For example, if the shares are sold by the child within five years of acquiring them, the transaction is deemed to have involved dividends and taxes will be charged retroactively.
We are not seeking preferential treatment for family farms, but instead looking to ensure the Income Tax Act recognizes real intergenerational business transfers and treats them accordingly.
In conclusion, I would like to thank the committee for its time and emphasize that the CFA seeks your support for the timely passage of Bill C-208. Bill C-208 is now the third iteration of the same bill, having been introduced to the House of Commons by three different parties, receiving multi-party support at third reading and now advancing further than either of its previous iterations. The potential to address this long-standing barrier to intergenerational family farm transfers has never been so closely in reach.
I would like to thank you, and I look forward to your questions.
The Chair: Thank you, Mr. Ross, for your presentation. We will now move on to Dr. Williams. The floor is yours.
Dr. Rick Williams, Research Director, Canadian Council of Professional Fish Harvesters: My thanks to the chair and committee members for the invitation to appear.
With the new Fisheries Act — Bill C-68 in 2019 — and new regulations in the act in 2020 to support Atlantic fisheries, the Department of Fisheries and Oceans has recently made a historic commitment to sustaining East Coast commercial fisheries as an industry composed of independent, community-based small businesses. The following quote is from the Canada Gazette publication of the new regulations:
Fishing remains one of the main industries in rural coastal Eastern Canada generating about $1.7 billion in landed value (inshore fleets only) in 2017 and supporting many fisheries-dependent communities.
In Atlantic Canada and Quebec, the fishing industry employs more than 59,000 fish harvesters and processing workers. The Government of Canada’s policy objective is for the wealth to remain in the hands of those individuals who actively fish and for the accumulated wealth to be reinvested and spent in coastal communities rather than have it concentrated in the hands of a few wealthy corporations in large urban centres.
Success in the pursuit of this policy requires three things: healthy commercial fish stocks, the continuing development of and access to global seafood markets and the availability of a skilled labour force and a new generation of enterprise owner operators. After the chaotic 18 months we’ve all just been through, we would all agree that nothing is certain, but I would argue that the first two of these requirements are largely under control for the next 25 years.
Ecosystem-based management and the enforcement of sustainable catch limits for most commercially important fish stocks is advancing well, although climate change is a looming threat. The resilience of seafood markets has been severely tested by the global pandemic, but the industry has survived well and this year will set new records for export earnings. A more or less fixed supply of wild-caught seafood products within sustainable harvesting limits facing rapidly growing global demand means the economic future for fisheries looks bright.
I would argue that the third factor represents the most serious and immediate threat to the core viability and economic sustainability of the commercial fishery. For proof of this, look no further than the recent The Big Reset report of the Newfoundland and Labrador Economic Recovery Team, chaired by Dame Moya Greene. The report asserts that demographic realities will soon force dramatic downsizing of the fishery, with big companies taking over quotas from failing small businesses. The report takes as a given that there are not enough people in rural Newfoundland and Labrador communities to sustain the kinds of fisheries that the new DFO policy and regulations aim to perpetuate into the future.
More salient facts: For every 100 workers now at retirement age in rural communities across Atlantic Canada, there are only 50 to 65 young people entering the labour force across different provinces. Roughly 40 to 50% of jobs will not be filled without extraordinary measures to attract and retain new workers from outside. The average age of working fish harvesters, captains and crew in Canada in 2018 was 47. In the year 2000, 14% of working harvesters were 54 years of age, i.e., at retirement age. By 2018, 36% were over 54, ready to retire. By conservative estimates, 40% of fishing enterprise owners will be beyond traditional retirement age and looking for buyers so they can exit the industry by 2025. The boom in the fishing economy — with 75% growth in after-inflation fishing incomes and 80% growth in after-inflation landed values from 2010 to 2018 — means that the fair market value of fishing enterprises keeps going up.
Intergenerational succession and labour force renewal are massive challenges in the fishery that threaten the sustainability of owner-operator fleets and the coastal communities that depend on them. A wide range of policy and program interventions will be needed: labour market information in career promotion, training programs, international immigration, financial incentives, et cetera.
If the tax savings identified in Bill C-208 become a reality for fishing enterprises, this will be a significant aid in meeting these challenges in three important ways. Facilitation of more intergenerational transfers within families will help retain young people in the industry and in rural coastal communities. Some reduction in upward pressure on enterprise will happen in terms of post-retirement tax impacts and net revenues for sellers. Tax measures that make transfers within families more attractive and financially advantageous may reduce incidents of corporate takeovers of owner-operator fishing enterprises.
In the little time I’ve had since yesterday to seek input on this question, it is my understanding that fish harvester leaders and organizations strongly favour this legislation. Thank you very much.
The Chair: Thank you, Dr. Williams.
Senators, you’ve just heard three excellent presentations. You have four minutes each for questions. If you don’t need all of that, then we will have time for a second round for those who may have longer questions. Keeping that in mind, I will open the floor to questions, starting with the deputy chairs.
Senator Oh: Thank you to the panel for their excellent presentations.
My question to all witnesses is this: In the industry, who will benefit from the amended act: the smaller or larger corporations? What kind of amendments are you looking for in Bill C-208? Are any amendments needed from your federation or association that will improve Bill C-208?
Ms. Pohlmann: Definitely. If you were able to see our report that was distributed, this is of wide interest to small businesses. I would suggest, based on our own research, that the smaller businesses are going to benefit from it most. They are more likely to want to sell or transfer a business to their children.
They will also benefit more because, as I mentioned, for many of them, the proceeds of the sale of their business is what really helps with their retirement. Being able to get as much as they can out of the value of the business will help them have a more comfortable retirement and not necessarily have to continue working well into later age, so it is an important resource for that.
It is extremely popular, especially among our members. We also have members in the fishing and agriculture industries, and they are particularly gripped with this issue. It is also of great importance to many other businesses across Canada, 25% of which want to sell to their children.
As for amendments, this has been a long time coming. We’ve been through this many, many stages before. As mentioned, this is the third time we’ve seen a private member’s bill in the last six years. At this point, we just want something to move forward with so that we have something that allows some businesses to start using this particular tax treatment given the large number of businesses that are planning to exit their business in the next, say, 8 to 10 years.
There are some things around the fact that it is not available once you reach that $10 million in taxable capital — or you start to lose it at least — and then it’s fully gone at $15 million. It would be good to have that brought a bit higher because there are a lot of smaller businesses that have taxable capital if they sell large machinery, for example. Yet they’re still a small business, so they might not be able to access it.
So things like that could definitely improve it. But at this point, we would like something to move forward and pass because it’s such an important measure that we don’t want an amendment to slow it down. At this point, that would be our take on this particular bill.
Senator Oh: Thank you. Mr. Ross, anything from you?
Mr. Ross: Yes, I would echo much of what Ms. Pohlmann said.
Also, from our perspective, when we talk about the size of businesses affected, often the term “corporate farm” gets thrown around quite loosely. It’s important to note that we see about 25% of Canadian farms currently being incorporated and that number going up. But those are predominantly family-run businesses. Nearly 98% of Canadian farms are family-owned and -operated businesses. Those farms that are incorporating are doing so for a variety of reasons, whether it is related to tax or liability issues.
We are seeing farms increase in size over time and supporting multiple families. In many respects, corporate structures help with that as well.
It is important to note that incorporated farms are predominantly still small- and medium-sized businesses run by Canadian families. We see this as being a very critical piece of legislation for all of those incorporated farms.
I would echo the sentiment that this is the third iteration of this bill. We have consulted on it extensively, both with our farmer members and with tax practitioners. While there are always further tax provisions that we would like to see around — I think a previous witness noted the desire to see broader family relations addressed in something like this — we would certainly like to see some of the rollover provisions for agriculture expanded to a wider set of family members. But I would view that as a separate discussion for another day and note that our members are very interested in seeing the existing bill move forward as it stands.
We see strong provisions in place to safeguard against tax avoidance and, outside of the thresholds that were mentioned before, broad eligibility for family farms to take advantage of this opportunity to help smooth the facilitation of family farm transfers, which will be critical to the financial health of those retiring and also for those new generations coming in and starting the management of their businesses as they look at a lot of opportunities facing our sector.
Senator C. Deacon: Thank you to our witnesses. They were excellent presentations. My question is predominantly for Ms. Pohlmann. It’s lovely to see you again. Thank you for all your work, and I really enjoyed your report.
I want to build off one of the questions that Senator Mégie had in the previous hour, which was around just trying to find the reasons why there is pushback from Finance Canada on this issue of fairness, as far as I am concerned, and the question around valuation. We increasingly see small businesses — certainly from the world that I spent a lot of time in — that are based on intangibles and that are predominantly digital businesses. Farming and fishing operations are highly tangible. But as we move toward small businesses that are based on intangibles, the question of valuing the business becomes very challenging. I know that personally; I have lived it.
Given that is one of the top barriers to succession and given that is one of the push-back points on this bill from Finance Canada, have you looked into that issue and how the bill is structured in order to make sure that fair valuation is in place — that defensible valuations are in place — for businesses that are based on intangibles relative to other operations?
Ms. Pohlmann: Thank you, Senator Deacon.
I don’t know if I have a really good answer to that question. It is a growing issue. As you saw in the research we’ve done, valuing a business is the second biggest challenge after finding a suitable successor. It is one we have been gripped with to try to figure out. No doubt, as some of these smaller businesses do become more innovative and do things differently, it will become a more difficult piece of the puzzle.
Again, I’m not sure that’s a good reason to prevent a bill like this to go through, that reason being that some sectors in some areas might have a more difficult time valuating the business. We need to figure out how to find ways to better value businesses that might have their value in a trademark, copyright, intellectual property or something along those lines.
But the vast majority of businesses probably wouldn’t be in that category just yet, so that should not be the reason that this bill should be held up. We can focus on ways to figure out how to value those businesses a bit differently that maybe don’t have as many tangibles.
Those would be my initial thoughts in terms of the question. Clearly, more work needs to be done for that group, but it should not stop this bill from going through, given it is a long-standing issue.
Senator C. Deacon: Thank you.
Senator R. Black: Thank you to our witnesses for their presentations. My first question is for Mr. Ross. Mr. Ross, it is good to see you again.
You noted 43,000 farm family corporations across the country. On average, how many intergenerational transfers of qualified small business farm family corporations occur each year? Can you provide the committee with a brief overview of how such transactions are typically structured, and how they impact the families running or involved in the farms?
Mr. Ross: I don’t have the number offhand as to the number of transitions that happen each year. However, we are seeing that rate vary a lot, particularly with the demographics shifting. We expect to see transfers to the next generation to increase in the next decade in particular. Given that the average age of family farm owners now exceeds 55, we expect the next decade to see in excess of $50 billion of farm assets transferring hands.
One quarter of farms are incorporated, and that number continues to rise. They tend to not be large businesses by any sense but on the larger side of agricultural operations and they are, as I said, often supporting multiple families. Just by virtue of that, you can see that we are talking about a significant amount of assets moving hands with the average capital on a farm now exceeding $2 million.
When we talk about incorporated family farms, the desired outcome is maintaining the financial health of the farm into the next generation and also ensuring that the retiring farmer is able to retire in financially viable terms. They rely predominantly on the proceeds of that transaction for that.
Often what will occur — and again, I will say I am not a tax expert — is that a holding corporation will be developed to allow us to alleviate some of the cash flow issues that come up, where they will sell shares of the corporation to a holding company that is owned by the next generation, allowing for a smooth transfer of assets from one generation to the next. The provisions in this bill ensure that the next generation is able to use their lifetime capital gains exemption in that process and also a lower tax burden associated with the tax rates of capital gains relative to dividends otherwise.
We’ve seen examples of a model farm that would see upwards of $300,000 of additional taxes levied against a family member receiving that farm versus an anonymous third party. That disincentive is very problematic to us in that there are so many reasons that family farming is critical to Canadian agriculture and the Canadian economy.
Senator R. Black: Thank you very much, Mr. Ross.
[Translation]
Senator Forest: Thank you, Senator Black, for giving me the rest of your time. I’m going to need it.
My first question is for Ms. Pohlmann, and a short answer would be appreciated. Has CFIB examined the tax rules in other countries relating to the transfer of small- and medium-sized businesses to family members versus unrelated parties?
If so, would you be able to provide that information to the committee clerk?
[English]
Ms. Pohlmann: No, we have not done that analysis.
[Translation]
Senator Forest: Have any of the other witnesses done a similar comparative analysis of the tax treatment and legislation in other countries?
[English]
Mr. Ross: We have not at the Canadian Federation of Agriculture.
Dr. Williams: No.
[Translation]
Senator Forest: That might be a worthwhile exercise at some point.
Mr. Ross, one problem, in particular, is having a rather dramatic impact where I’m from, and probably in other regions of Canada as well. When farmers want to transfer their businesses to their children, oftentimes, the tax environment penalizes them so much that they end up breaking up the farm business, selling off their dairy quotas, equipment, property and so forth. As a result, the number of farm businesses in small communities is on the decline. The same thing happens in the fishery sector, when fishers have to sell their quotas.
Do you have any statistics on how many farm businesses were essentially broken up and sold off rather than being transferred to a family member or unrelated party?
I can think of a number of examples, but do you have any statistics that capture the phenomenon on a national level?
[English]
Mr. Ross: It’s very hard to parse out the drivers of what is driving other consolidation of farms or segmentation. What we see is that in every census cycle, we lose about 5,000 farms, and we generally see the average size of farms increasing. More often than not, the barriers that we’re talking about with succession planning for these small businesses make it harder and harder for them to remain small and pass on to the next generation, which drives consolidation to some extent. That isn’t necessarily a problem, by any means. There are economies of scale and a variety of reasons farms increase in size, but certainly tax barriers to smooth transfers of farms disproportionately affect those smaller businesses that are, in this case, incorporated. It makes it hard to keep operating at that scale.
[Translation]
Senator Forest: It’s having a visible impact on not just farming, but also communities. Communities are losing families, schools are losing kids because the family farm has been broken up and sold off. The farm is no more.
That can have a significant impact on the survival of a small community, so much so that a tax environment conducive to the transfer of small farm businesses is needed.
Again, the same is true in the fishing sector.
[English]
Senator Hartling: Thank you to the witnesses. It is very interesting hearing from different people on these issues. I’ve been thinking a lot about the pandemic and food security and things like that. I’m wondering if this bill is timely in that sense. In New Brunswick, a lot of people are moving back to New Brunswick, and especially families are coming home. I’m wondering what your thoughts are and whether you’ve done any exploration on that topic, whether you think this will encourage the engagement of family members in the family business and if the bill will help that transfer.
Mr. Ross: Yes. Thank you for the question, senator. We do see a very unique opportunity in time of right now, relating to COVID in particular. The exodus from urban centres to rural communities is a very critical injection of vibrancy in some communities that are otherwise struggling with population stagnation. We see this bill as an opportunity to address that social fabric of rural communities and ensure there is an abundance of opportunities for small businesses.
One of the challenges we’ve seen over the past 10 or 15 years in particular is the ability to maintain the next generation in those communities. With this added attention to rural quality of life, it’s a unique benefit that our sector provides. I think that coupled with the opportunities for economic growth in our sector, this bill is at a very timely moment and would certainly spur the financial health of the sector into the next generation.
Dr. Williams: It’s a very interesting question. Our leaders in our sector definitely see this kind of change as one of a number of things that needs to be done, but definitely a useful and important thing. What I’m hearing from industry leaders right now is that any fishing enterprises that come up for sale are finding buyers. The real crunch is at the level of recruiting new crew members and new workers coming in. The flow of people back to rural communities in places like New Brunswick has impacted on the availability of buyers of enterprises — people wanting to get into a successful business. It may not have the same benefit in terms of rebuilding the core labour force. The paradox there is that young people thinking of a career and looking at the rising value of fishing enterprises need to know that there is a pathway to becoming owner operators. These kinds of tax measures and other incentives and supports will be extremely important in that regard.
Ms. Pohlmann: I wanted to add that one of the things we found in our work on the pandemic is that one of the big impacts of the pandemic, among many, of course, has been that a good chunk of folks who wanted to retire in the next five or six years have now had to push that back because of, obviously, the valuation of the business, the uncertainty of it and they have debt now that they didn’t have before. This sort of bill may help speeding it back up to where they want it to be because they can rely on the fact that if they can pass it to their children like they intended, maybe they can make up some of the debt that they owe or other things in order to have the money they need and to have a business that they can pass on to their children. That’s a key piece of this as well that I wanted to add to the mix.
Senator Hartling: Thank you.
Senator Mercer: Thank you, witnesses, for being here. I may not have an actual question, but I have a comment. Senator Forest’s question with respect to data is a very important one when we consider the results of passing this bill. Eventually, when we sit at these tables in, say, five years’ time, we’ll finally have some data because we know that the department will be keeping records of who has taken advantage of this. Is that enough data that we need in the future? We’ve heard comments that we lose a farm a day in Quebec and we don’t know where it’s gone.
I mean, the farm didn’t disappear, but the ownership may have. Is this going to give us enough data in the future to help us plan better?
The Chair: Ms. Pohlmann, do you want to lead off?
Ms. Pohlmann: I would hope so. I think that any tax measure is probably always going to have an element of risk to it. What I like to look at is, yes, we like to see how much that risk is, but we also need to see, follow and track the benefits. How many businesses have been saved? How many have stayed in the family as well? I want to make sure, as we track data on this, that we’re not only tracking where it may have been abused — I think there have been a lot of caveats put into this bill to try to prevent that as much as possible — but also track how much benefit it has brought to the economy, those businesses and those communities where those businesses were able to continue on in a way they might not have been able to had they not had this measure in place.
The Chair: Dr. Williams.
Dr. Williams: I haven’t done any international studies on tax legislation or tax measures. I have studied the extent to which different countries — big fishing countries, competitors with Canada, the U.S., Iceland, Norway and so on — have comprehensive strategies to rebuild the labour force and support intergenerational succession. Among the major fishing countries, Canada almost stands alone in terms of not having a strategy in the fisheries area. There isn’t a lead agency with a commitment in this area. In agriculture, the Canadian Farm Loan Board — now known as the Farm Credit Corporation — and other Agriculture Canada programs are very active in supporting succession in the farming sector. However, I just want to register that in the fishery, this is a real gap that needs to be addressed.
The Chair: Thank you.
Mr. Ross, do you have a comment on that question?
Mr. Ross: I would echo Dr. Williams’ concern from his previous remarks around the labour force. I would also note that this bill does include an affidavit being signed to the CRA for these transactions that would provide line of sight and visibility on what is happening in this space, which would be very important for us to better understand what is happening in family farm transfers.
Senator Mercer: Thank you, witnesses. I do have to apologize. I have to run to another meeting shortly. If you’re looking for me in the next round, I might not be here.
The Chair: Thank you for your participation and for giving us that warning that you’ll be leaving.
Senator Petitclerc: Thank you to our witnesses for your opening remarks and answers. In the first panel, we had the sponsor of the bill, MP Maguire, mention that if this bill passed, it could have an impact on the participation of women in small businesses and the farming industry. When I look at those numbers, what I see is 16% of small- and medium-sized businesses — and only 16% — and only 29% of family farms are majority-owned by women.
I want to hear from each of you on that. Do you believe that such a bill will have an impact on this participation of women who clearly are unrepresented? I’m not sure who wants to start. Maybe you want to address that, Ms. Pohlmann?
Ms. Pohlmann: I think it’s an interesting question. I don’t have any evidence or data to support whether it would or would not. However, I would imagine it would probably help in terms of being able to transition to daughters of family members in a way that is probably less viable right now. However, I don’t know at the end of the day whether that is going to happen.
Generally speaking, we’re all encouraging more women to get involved in the running of a business. More and more of them are being involved in the running of a business, whether it’s a majority-owned or a partnership. We see that when we have partner ownership, it’s almost about 50-50 that women are a part of the partnership. That is good news. I would think that it would, potentially, help encourage more family-run businesses to pass it on to their children, whether it’s their daughter or their son.
Senator Petitclerc: Thank you. Would the other witnesses want to answer? I know it’s probably difficult to quantify, but I would like to hear from your organizations with your input or thoughts.
Dr. Williams: I do know that, in the fishing industry, there’s been about a 10% increase in the participation of women in the fishing labour force over the last 15 years. So there will be more women who would be considering becoming owner operators, perhaps when their parents are ready to retire. They would benefit from this.
Mr. Ross: I would note that we have seen a formal increase in the statistics of female owner operators in agriculture. What I would say is there is a lot of unrecognized, unpaid labour and unrecognized management of women in agriculture that is not reflected well in the statistics. One of the elements we’re very focused on at CFA is trying to ensure that women’s contributions to our sector are better captured in the surveys and data that is collected. As it currently stands, there are many women managing farm operations that aren’t captured in the surveys that are conducted. I think part of this is better ensuring that we’re collecting the right data and asking the right questions to reflect the management and leadership we see of women in our industry.
[Translation]
Senator Forest: When we talk about 5,000 farms disappearing every year, in Quebec alone — unless I misread the numbers — we are talking not about businesses that were transferred, but about farms that closed down, that were broken up. That really worries me.
Here is my question. The main concern when it comes to the tax system are loopholes and abuse. The primary safeguard in the bill ensures the son or daughter buying the family business keeps the business for at least five years. I think that’s perfectly reasonable. It’s a measure that will prevent people from taking advantage of tax loopholes. My question is for Ms. Pohlmann, the CFIB representative. Did you consider other possible safeguards? As far as I can tell, this one seems sufficient, but I’m curious as to your expert opinion. Am I right to think you prefer a belt and braces approach?
[English]
Ms. Pohlmann: I do think it’s sufficient. I think five years is even a little long. However, again, we’re keen on having this particular bill pass and become law, so that we can then work with it and figure out where some of the gaps may be in the future.
I know in previous iterations of the bill, it was shorter. That was one of the criticisms extended in this bill and, I think, in the previous one. We believe requiring somebody to keep the business for at least five years — what it doesn’t take into account, of course, is life. With human beings, things change, so I would hope there would be some flexibility over time to address when circumstances may change in a family, and they may have to get rid of it within a five-year time frame. I hope there can eventually be some flexibility built into this particular legislation to allow for that — not where it’s abuse, but where there are other circumstances that require them to pass the business on within five years.
The Chair: Dr. Williams.
Dr. Williams: There is a specific challenge in the fishing industry in that current licensing policy in the major fisheries — lobster, snow crab, et cetera — in Atlantic Canada require the owner of the licence to be an active fish harvester.
There has been a history of under-the-table arrangements whereby fish processing companies take effective control of the beneficial ownership of the licence by financing the transaction.
If a child is buying out a parent, from a DFO licensing perspective, there will be due diligence to ensure that that is not a hidden process whereby an external corporate entity is actually taking control of the licence, but that is a special situation in the fishery.
[Translation]
Senator Forest: Mr. Williams, I think it’s an excellent idea to make the transfer of a crab, lobster or offshore licence conditional on the licence holder being an active harvester. That protects against vertical integration by massive companies that would seek to acquire fishing rights, thus depriving small coastal communities of an economic contribution and hugely important economic sector. Am I right to think so? How’s that for bait?
[English]
Dr. Williams: That is absolutely the intent of the new regulations that I referred to in my presentation. As I say, it will require due diligence to examine transactions within families to ensure that they actually are what they appear to be.
The Chair: Senator Deacon?
Senator C. Deacon: Thank you, chair. We’ve had some excellent testimony, and I’ll pass to Senator Black.
Senator R. Black: Thank you, Senator Deacon.
My question is for Mr. Ross. Before I ask the question, Mr. Ross, congratulations on your new child.
Mr. Ross: Thank you very much.
Senator R. Black: It’s good to see that you’re here this morning. It must not have been an easy night for dad.
My question is to further clarify. Are there any impacts that you expect on Canada’s rural communities with respect to this? I know you’re with the Canadian Federation of Agriculture, but obviously rural is a big component. If you could speak to us about the impacts on rural Canada. Thank you.
Mr. Ross: Certainly. There is certainly a benefit to rural Canada through this bill. If we look at the tax liability that could be increased under the current structure of $200,000 to $300,000 for many of these businesses, that is capital that will stay in those farm businesses that disproportionately spend in their local communities. The knock-on effects, when you translate that across 43,000 incorporated farms, are immense for rural Canada. Not only does it keep vibrant small business communities present, it also leads to a lot of additional spending in those communities.
Senator R. Black: Thank you, Mr. Ross.
The Chair: I would like to thank the witnesses. We have received a lot of great information.
I would also like to thank the senators for their time and energy today in terms of asking questions. We will be meeting again one week from today, and we will hear from departmental officials at that meeting.
(The committee adjourned.)