Income Tax Act
Bill to Amend--Second Reading
May 27, 2021
Moved second reading of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
She said: Honourable senators, I rise today to speak to the second reading of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
Similar legislation has been introduced in past parliaments by NDP M.P. Guy Caron, Bloc Quebecois M.P. Xavier Barsalou-Duval, and Liberal M.P. Emmanuel Dubourg. This iteration of the bill was introduced by Conservative M.P. Larry Maguire.
Bill C-208 effectively makes it easier to hand a business down from generation to generation, and as someone who grew up on a family farm, I’d like to thank Mr. Maguire for introducing this bill and sticking up for family businesses.
Bill C-208:
. . . amends the income tax in order to provide that, in the case of qualified small business corporation shares and share of the capital stock of a family farm or fishing corporation, siblings are deemed not to be dealing at an arm’s length and are related, and that, under certain conditions, the transfer of these shares by a taxpayer to the taxpayer’s child or grandchild who is 18 years of age or older is to be excluded from the anti-avoidance rule of section 84.1.
Colleagues, the bill addresses an issue that has persisted for years. It is financially more advantageous to sell one’s business, farm or fishing operation to a third party rather than to pass it on to the next generation. In his second-reading speech, Mr. Maguire explained it in this way:
Bill C-208 would allow small businesses, farm families and family fishing corporations the same tax rate when selling their operations 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 price and the original purchase price is considered to be 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 use the lifetime capital gains exemption.
As the Conference for Advanced Life Underwriting, the CALU, explained in a brief prepared for the House of Commons Finance Committee:
. . . business owners may feel they have no other choice but to sell the business to non-family members in order to preserve the more advantageous capital gains treatment. Alternatively, the business owner is forced to structure the sale to a family member in a way that significantly increases the after-tax costs of financing the sale, straining their financial resources and those of the business.
There is significant benefit to the community when businesses are handed down from generation to generation. As Mr. Richard Lehoux, Member of Parliament for Beauce, said in his second reading speech in the other place:
Everyone in the House knows a factory, a family restaurant, a corner store or a farm in their riding that has been around for generations. These family businesses are well liked and extremely important to the local economy. These small businesses are the backbone of our society. Some of these businesses not only help feed our communities, but they also provide important jobs for the people in our ridings.
I bet that while you listened to that, you had one or two businesses from your home community come to mind. I know I did. Small businesses are so important to our local economies. As Cindy David from the CALU told our colleagues in the other place:
. . . small businesses employ 70% of the private sector and have been major contributors to employment growth over the past decade. A vast majority of those businesses have fewer than 20 employees. They play a significant role in supporting the economies of smaller communities across Canada.
I thought, too, of all the family farms in Canada owned by farmers who are nearing retirement age. I know from my work on the Agriculture and Forestry Committee that they are plentiful. As Scott Ross, Assistant Executive Director of the Canadian Federation of Agriculture, told the House Finance Committee:
. . . the average age of Canadian farmers now exceeds 55 years of age, and the opportunities these businesses face will 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 interests of all Canadians, as studies show 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.
In an interview that appeared in the Charlottetown Guardian this week, Ron Maynard, President of the P.E.I. Federation of Agriculture, pointed out that many farmers plan to retire on the proceeds of the sale of their farm. He said, “It’s our pension.” He went on to say:
If you look at what it means to an individual, if I were to sell my business to family, the difference could be as much as $300,000 in what I would be left.
And, of course, being from Prince Edward Island, I am sympathetic to the challenges facing our fishermen and fisherwomen. As Mr. Gord Johns, the NDP Member of Parliament for Courtenay—Alberni, pointed out in his second reading speech in the other place:
. . . in fishing, if a person were to sell a family fishing operation to someone in their family, they would keep the quota and the jobs in the family. However, if a family member had to pay more tax, they would be more likely to sell to an international company or large conglomerate, which would hoard fishing licences and then lease them out to fishers.
And as Xavier Barsalou-Duval, Bloc Québécois Member of Parliament noted, “Fifty years ago, fisheries were flourishing in the regions, but today, fishing villages are disappearing one after the other.”
I know that in my province of Prince Edward Island, fishing is an incredibly important vocation, especially in our smaller communities. I would not want those communities to suffer because of a lack of action in our chamber. Jennifer Dunn, a tax partner at BDO in Charlottetown, told The Guardian:
Bill C-208 is a significant win for the small business community ... it’s about bringing fairness and equity, from a taxation perspective, to the transfer of a family farm, corporation, fishing enterprise or small family business.
A 2018 survey conducted by the Canadian Federation of Independent Business found that 72% of business owners plan to exit their businesses within the next 10 years, but about half do not have a succession plan and only 8% have a formal written plan. Dan Kelly, CFIB’s President and Chief Executive Officer, told the House Finance Committee:
Far too few businesses operate with a proper formal succession plan. It is a concern for us. Tax policy plays a role in this. We want to make sure that the barrier to transferring your business from one family member to the next is smooth.
The bill has built-in safeguards that provide that the family member who buys the business must keep their shares for at least five years so as not to be penalized, except in the event of the buyer’s death. Brian Janzen, Senior Tax Manager at Deloitte, told the House Finance Committee:
This bill . . . has some caps on value, which is great. This bill is helping the lower end of the small business community. It is not helping the huge, rich companies, even if they’re family owned. The impact of section 84.1 on them is a drop in the bucket. This is helping the smaller families.
In the other place, this bill received support at third reading from all members of the Conservative Party, all members of the Bloc Québécois, all members of the NDP, all members of the Green Party, and 19 Liberals. The government had reservations, but to quote the Honourable Wayne Easter, my friend, fellow Islander, and the chair of the House Finance Committee:
. . . the finance committee held a very intensive hearing into this. We passed it back to Parliament. We looked at the tax implications.
The bottom line is what this bill means for the community. The backbone of the community is small businesses, farmers and fishermen, and especially those who can pass a business down from generation to generation. This is an issue of tax fairness and should be supported fully.
Colleagues, this bill has now been introduced four times. Let’s get it to committee and across the finish line before the clock runs out on this Parliament. We owe our communities no less.
Honourable senators, I am pleased to speak to this bill, which seeks to resolve a problem that has been of concern to me for a long time, because it is basically a matter of fairness.
It is wrong that it is more advantageous to sell a small family business to a stranger than to a family member.
According to the Canadian Federation of Independent Business, nearly half of small business owners would like their children to take over their family business. However, the current rules in the Income Tax Act hinder the sale of a business to family members because selling it to a third party is more advantageous from a tax perspective. The sale of shares to a family member is considered a dividend, whereas the sale to a third party is considered a capital gain. As a result, business owners who sell to their children are unable to benefit from the lifetime capital gains exemption, which means they have to pay a much higher tax bill.
In his testimony before a House of Commons committee, a Department of Finance representative, Trevor McGowan, a senior director at the Tax Legislation Division, acknowledged that, for a top-marginal-rate taxpayer in Ontario, there is a huge difference between a tax rate of approximately 47% on dividends and a tax rate of approximately 26% on capital gains.
Here’s a concrete example. A farmer who opts to transfer a medium-sized farm valued at $10 million to his children rather than a third party would sacrifice $1.2 million outright. That is a big deal considering that, for many business owners, it is the only asset they have to fund their retirement.
Bill C-208 would level the playing field for an owner who has to choose between their retirement fund and passing their business on to their children. We need to keep in mind that this bill is good for society as a whole because it supports economic activity and protects Canadian ownership of our businesses.
Consider the agricultural sector. Quebec loses one farm every week. The situation is probably similar in the rest of Canada. Now, you may ask, if our agricultural system can keep producing just as much with fewer farmers, why we should worry about disappearing family farms?
It is important to realize that family farms and small businesses have always played more than just an economic role. When we lose a family in a rural community, we lose schools, services and jobs. The lack of services makes communities less attractive. It’s a vicious cycle we call “devitalization.”
Having witnessed the Operation Dignity campaign in the Lower St. Lawrence and the Gaspé in the 1970s, which arose in response to the Government of Quebec’s stated intention of closing around 100 “devitalized” municipalities, I can assure you that our constituents instinctively understand how much family businesses contribute socially and economically and that they expect governments to support this business model, which is essential to the prosperity of Canadian communities.
If we want to ensure the future of our agriculture sector, and if we are serious about food security, as we have so often repeated during the pandemic, then at the very least, we must ensure that our tax rules do not penalize family farm transfers and do not facilitate the takeover of our farmland by foreign interests.
Governments are bringing in programs to stimulate entrepreneurship and support new businesses, but they would be well-advised not to torpedo the efforts of business owners who are already in business and are simply trying to pass the torch to people they have often trained at their own expense for years.
I would like to mention that every party in the House of Commons recognizes the problem. The bill was introduced by a Conservative member, who borrowed it from an NDP MP — who was the MP for my riding at the time — who based his version on a Liberal bill that was introduced in 2015.
All the opposition parties supported Bill C-208. While the Liberals voted against the bill, they do acknowledge that there is a problem, and they are trying to find a solution. In his mandate letter to the Minister of Finance, the Prime Minister specifically asks her to do the following:
Work with the Minister of Agriculture and Agri-Food on tax measures to facilitate the intergenerational transfer of farms.
Nothing could be clearer. The bill also has significant support in the business community. It is supported by the Canadian Federation of Independent Business, chambers of commerce, the Association des marchands dépanneurs et épiciers du Québec, the Insurance Brokers Association of Canada, the Canadian Federation of Agriculture, the Union des producteurs agricoles, and various fishers’ associations, including the Nova Scotia Fish Packers Association.
There is a broad consensus on the need to restore tax fairness so that a business owner who sells their business to their children is not penalized. For the past decade, this consensus has been coming up against the fear that exempting family transfers from the anti-avoidance rules in section 84.1 of the Income Tax Act would encourage tax fraud.
According to the Canada Revenue Agency, the worst-case scenario would be that the parent handing down the business would be able to extract the business’ retained earnings by merely pretending to hand over the business to their child. Then, after a series of complex transactions, the individual would withdraw the earnings from the business without paying taxes, thanks to the lifetime capital gains exemption. They would then be able to continue operating the business without the child’s involvement, which is normally impossible when there is a foreign purchaser.
Clearly, no one wants to create that kind of loophole, which is why some guardrails have been put in place. For example, the bill requires that the purchaser retain their shares for a minimum of five years. If the purchaser retains their shares for that period, that provides some assurance that this is a genuine family transfer and not a scheme to avoid paying taxes. Other conditions could potentially be added, requiring that purchasers demonstrate a minimum level of control over the business. Our friends at the Canada Revenue Agency are creative, and I am sure that they will have some thoughts on this.
It is also important to understand that Bill C-208 applies only to SMEs that have less than $15 million in taxable capital, which reduces the pool of businesses that can afford to pay the transaction fees associated with the implementation of this type of very complex corporate tax arrangement.
With regard to the risk of tax evasion related to Bill C-208, I would like to quote what Brian Janzen, a senior tax manager at Deloitte, told the House of Commons Finance Committee. He said, and I quote:
. . . I do think Bill C-208 does have enough guardrails, at least initially. As someone who has practised for 34 years, I’m going to preface this by saying that someone will always find something. Even if you think you have the proper guardrails now, you may have to tweak them later. . . .
With the guardrails . . . I think this is perfect for the beginning of the bill. If it does need to be tweaked later, so be it. For now, though, this is a great limitation for any abuse, in my mind.
We are in a unique situation. We have never been this close to getting rid of this thorn that is hindering the transfer of SMEs in Canada. However, we need to recognize that there is a very real chance that there will be an election in the fall, and so we need to step on the gas in order to resolve this problem once and for all.
If you agree that it is necessary to correct this inequity, I urge you to send the bill to committee quickly. We can then hear from tax experts who can help us assess the guardrails that were put in place, so we can see to it that the bill restores tax fairness for our business owners, while making sure that everyone pays their fair share of taxes, no more, no less.
Thank you. Meegwetch.
Would Senator Forest take a question?
With pleasure.
Thank you for your speech, Senator Forest, and I also thank Senator Griffin.
Like you, I am concerned about the issue of small and medium-sized businesses in our regions. For example, the fishing industry is having problems related to the transfer of family businesses, especially in the region I am from.
You’ve given us some explanations for why the government hasn’t made any changes for so many years. In doing your research, did you find any data showing how many cases of tax fraud there may have been? Have there been enough cases to justify the government waiting so long before making this change?
There is no data on the number of cases of fraud that have occurred. The factor we are basing this on is the deferral of this change, which would address a fundamental issue of inequity between the two tax rates. With respect to tax rates on a transaction, if we’re talking about dividends, the rate is 47%, but for capital gains, it is 26%. There is a pretty big gap between the two.
From what I recall, the revenue losses on these transactions were estimated to be over $1 billion. They were revised by the Parliamentary Budget Officer, significantly downward, in my opinion — and I am again quoting from memory — to somewhere between about $163 million to just over $200 million. An assessment not has yet been done, but perhaps further research into the number of cases of fraud that may have occurred would provide clearer answers. However, since the law has not been changed regarding the Canada Revenue Agency’s role, this limits our expertise somewhat.
Thank you.
Are senators ready for the question?
Is it your pleasure, honourable senators, to adopt the motion?
Some Hon. Senators: Agreed.
An Hon. Senator: On division.
(Motion agreed to and bill read second time, on division.)
