Income Tax Act
Bill to Amend--Third Reading--Debate
June 17, 2021
Moved third 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 am pleased today to speak to Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation). We studied the bill at the Standing Senate Committee on Agriculture and Forestry, where we heard from Mr. Larry Maguire, the MP sponsor of the bill, from a tax specialist at Deloitte Canada and from other witnesses such as the Canadian Federation of Independent Business, the Canadian Federation of Agriculture, the Canadian Council of Professional Fish Harvesters as well as from the Department of Finance Canada.
Ultimately, the bill passed in our committee without amendment.
It was less than a month ago that Senator Forest and I gave our second reading speeches, so today I will be brief. This bill would make it easier for small businesses, firms and fishing corporations to be handed down from generation to generation, and it has safeguards built in to ensure that people don’t skirt the rules. Stakeholders told us that the bill would especially help rural communities and the businesses that keep them going.
The problem addressed by Bill C-208 has existed for decades, and over the years, parliamentarians of all stripes have introduced legislation to correct it. As Brian Janzen, Senior Tax Manager at Deloitte, told our committee:
This has been studied to death over 25 years. . . .
This is a very basic bill with very basic, clear safeguards. There is no room for loopholes . . .
. . . we definitely don’t need any more studies on this. . . .
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.
I was struck when Corinne Pohlmann from the Canadian Federation of Independent Business observed:
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. . . .
Colleagues, I’m asking for your help. This bill had support from all parties in the House of Commons. Let’s vote on this bill and show our farmers, fishers and small business owners that we appreciate them, and we want their businesses to thrive in our communities for many years to come.
Thank you.
Senator Loffreda, do you have a question?
Yes. Would Senator Griffin take a question?
Certainly.
I do support the bill, but I have a question. In your work on this bill and in your dealings with the sponsor of the bill, has there been discussion about expanding eligibility of this bill to all family-owned corporations — not only small businesses — or for partial sales of family businesses?
I ask the question because not all family-owned businesses fall into the small business definition of this bill, and allowing partial sales is something that I think might deserve further consideration. Partial sales would certainly facilitate a proper transition and training of buyers, where required, which, in many instances, is key to ensuring a viable and vibrant family business landscape in Canada. As our small businesses grow, it would be nice to know that they would be eligible for the same treatment.
As I said, I do support the bill. Thank you for your work on this, but I would like to maybe further expand on this idea if you could share your thoughts with us.
Thank you for the questions. The first is about the bill being squarely focused on small- and medium-sized businesses. The reason for that is it was a political decision in the House of Commons in order to gain support for the bill. There was wide support for the idea of helping small businesses with this unjust tax structure, but the point was made to us by the independent business representative as well as the Deloitte tax specialist that this bill should be seen as a good start and that at some point the government may want to extend it to larger businesses. That’s why there is a cap on the amount that can be considered at this point.
That’s not to say it can’t be changed in the near future or long-term future once we see the success of this, and the government, of course, has the option of going further with it.
As for the partial sale of the operation, yes, that can happen, but the purchaser — that is, the kids or the grandkids — must have control of the organization, which would be at least 51% of the total shares, in order for that partial sale to be valid. That’s to ensure, first, that the sale will be controlled by the next generation and that the parent, by the way — the seller — cannot own any shares of the purchasing corporation. In other words, they can’t be financially involved in this in both places.
I think with these safeguards this bill will indeed be a great start, and I hope it will help a lot of small businesses in our country, whether they be a small family business, a farming business or a fishing corporation owned within a family.
Thank you for the answer, Senator Griffin. As I said, I do support it.
With respect to partial sales, what is also important is that in transitioning businesses — I have seen so many over the years — sometimes you don’t want to give the 51% to your children. You want to give them a small portion to train them or to see if they have the management skills to move it forward. That is important for our landscape, and if we look at succession, I don’t want to just dump numbers as to how many family businesses will be changing hands, but many will. Perhaps there could be an undertaking from us that we should look into the matter. No bill is perfect at times. I support the bill, but going forward we should make it available to all family businesses and to partially owned or partially sold businesses to allow for proper transition and training.
I do like what you did say that it’s a good start, and I urge all senators to support it because it is a good start, and family businesses deserve to be treated on an equitable basis as all business transactions and transitions.
Thank you for your comments. I think that’s a great suggestion and some future work that could be undertaken.
Thank you very much.
Honourable senators, I am pleased to take part in the debate at third reading stage of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
I participated in the study at the Standing Senate Committee on Agriculture and Forestry, and I am pleased to report that we heard from officials from the Department of Finance, the Canadian Federation of Independent Business, and representatives of businesses in the fisheries and agriculture sectors.
The unintended consequences of the current tax policy, which penalizes transfers between members of the same family, are well known. This policy favours the dismantling of businesses, forces business owners to choose between their children’s future and their own retirement fund, and helps foreigners take over our land and businesses.
Let me focus on the impacts of business dismantling mainly in the agricultural sector, because it is an issue of particular concern to me.
Canada, like Europe and the United States, is not immune to the major trend of farm population aging, which could impact succession planning and the consolidation of our businesses.
Just looking around our rural areas and villages, it’s easy to see that there has been a major drop in the number of farms, an increase in farm size and, as you might expect, a major increase in the value and debt levels of businesses, which makes transferring them more complicated.
The past few decades have not been easy for our farmers. The phenomena that I mentioned encourage owners to dismantle farms rather than keep them going as family farms.
When a farm is dismantled, or worse, when farmland is abandoned or rezoned for non-agricultural uses, our rural communities inevitably suffer. With fewer children, rural areas often lose their school, followed by the post office, the grocery store and the credit union.
I do not want to be too pessimistic. However, I think a call for vigilance is in order, since Quebec is losing one farm a week right now. Our family farms and SMEs are important to the vitality of our communities.
Let’s work to ensure their survival by cutting red tape and, more importantly, eliminating tax inequities rather than encouraging business dismantling.
I think there is a broad enough consensus to recognize that the current tax policy is problematic.
It’s bizarre that selling a business to a family member is considered to be a non-arm’s length transaction and treated as a dividend, whereas selling a business to an entity outside the family is considered to be an arm’s length transaction and treated as a capital gain.
I’d like to give you an idea of the impact of our tax system. It’s absurd that the owner of a small business valued at $2.7 million — we’re not talking about a multinational here — should have to pay $272,000 for choosing to transfer their farm to their children rather than to a stranger.
In committee, witnesses said they were satisfied with the solution proposed in Bill C-208. Treating the sale of a family business to a child — not a cousin or a nephew — as a capital gain would restore tax fairness as compared to transferring the business to a stranger.
It remains to be seen if this move opens the door to tax evasion.
Officials from the Department of Finance told the committee about their concerns. They said they were worried that it would be hard to tell legitimate family transfers apart from transfers carried out specifically to avoid paying taxes.
That said, the legislative intent is clearly articulated in this bill, which covers only business transfers to children, I repeat, children. Anyone attempting to engage in aggressive tax planning using the accommodation in Bill C-208 could very well end up in court because of the general anti-avoidance provision in sections 245 and 246 of the Income Tax Act. Parliament has the legislative tools it needs to intervene if these amendments are abused.
It is also worth noting that, by requiring the buyer to retain their shares for at least five years, the bill does offer some safeguards to ensure that it is a genuine transfer from one family member to another, not a scheme to avoid paying tax.
I will stop there, colleagues, because I would like us to get to the vote quickly.
Let me be clear: This is not about giving preferential treatment to families with small- or medium-sized enterprises. It is simply a matter of giving them access to the same opportunities that are offered to individuals who are not part of the same family.
This is a simple thing we can do to support human-scale businesses, our family businesses, and many communities outside major urban centres. This is an important move that will help us counter the economic and social decline of our regions.
As you know, Bill C-208 was passed by a majority of elected parliamentarians of all parties. I think it would be disrespectful to our regions and to the elected House to let this bill die on the Order Paper without at least voting on it. Running down the clock to avoid a formal vote would undermine our efforts in recent years to enhance the Senate’s relevance and credibility.
Thank you, meegwetch.
Honourable senators, I rise to speak at third reading of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).
As has been made clear in this chamber and in the other place, the government considers this an important public policy objective and that is why the Prime Minister accordingly mandated the Ministers of Finance and Agriculture and Agri-food to work together on tax measures to facilitate the intergenerational transfer of farms. The government wants to achieve that, and it is with this in mind that Bill C-208 bears careful consideration.
However, Canada’s tax system is intricate and thus requires a carefully designed approach to achieve those objectives to mitigate the risk of tax avoidance while ensuring appropriate safeguards are in place. It is precisely in this regard that Bill C-208 fails to address these issues and, respectfully, does not have the government’s support.
In summary, Bill C-208 aims to amend two of the Income Tax Act’s most important and complex anti-avoidance rules. These capital gains stripping and surplus stripping rules deal with the treatment of intercorporate dividends and share sales in the context of the circumstances in which the lifetime capital gains exemption can be claimed so that this exemption is not abused. Any changes to these sections of the act should accordingly be undertaken with caution.
That’s where Bill C-208 raises concerns. The bill, as presented, does not require that the parent cease to control the business, nor does it require that the child have any involvement in the said business. Furthermore, it would allow the parent to sell shares to a child’s holding corporation and then purchase the child’s holding corporation, leaving the child with no interest in the business.
Colleagues, these are serious tax-avoidance opportunities that will come at a significant cost to the fiscal framework which the government has already carefully plotted out in Budget 2021. In short, Bill C-208 would provide considerable benefits to some taxpayers in the form of tax-free distributions of corporate surplus without adequately ensuring that a genuine intergenerational business transfer has occurred.
Trevor McGowan, Director General, of the Tax Policy Branch from the Department of Finance Canada appeared before the Standing Senate Committee on Agriculture and Forestry on Bill C-208 and noted this issue:
This bill raises a fundamental concern in that it is intended to apply to intergenerational transfers of shares, but it lacks any safeguard to ensure that it is only used for genuine intergenerational transfers, so while the failing of the current rules might be that it contains an anti-avoidance rule that lacks an exception for genuine intergenerational transfers, you’ll see Bill C-208 essentially creates a loophole that lacks appropriate safeguards to ensure it is only used for genuine intergenerational transfers.
As a result, the loophole introduced by this bill could be used by wealthy individuals to avoid taxes without intergenerational transfer of the business actually taking place. The real challenge in preparing legislation dealing with this is how to draw a line between genuine intergenerational transfers and tax avoidance schemes. This bill doesn’t do that; instead, it simply applies regardless of which side of that line a transaction falls on.
Therefore, colleagues, it is important to consider in detail how these anti-avoidance rules work, why they are important and how Bill C-208 fails to maintain their integrity.
The existing anti-avoidance rules in section 84.1 of the act prevent the abuse of the tax system in cases where an individual converts dividend income into lower taxed or tax-free capital gains by selling shares of one corporation to another corporation that is linked to the individual.
A simple example can help illustrate the type of planning that the anti-avoidance rules are intended to prevent. An individual who lives in Ontario and is in the top income tax bracket in 2020 owns an operating corporation with $100,000 of retained earnings. If paid out as a dividend, the owner would pay approximately $48,000 of tax. Therefore, they set up a holding corporation and sell shares of the operating corporation to the holding corporation. If taxed at capital gains rates, the owner would pay approximately $27,000 of tax, saving $21,000, nearly half the tax otherwise payable. If the lifetime capital gains exemption is available, the retained earnings would be extracted tax free.
The surplus stripping rules shut this sort of abuse down by, in specific circumstances, deeming that the individual has received a taxable dividend from the linked holding corporation rather than a capital gain. This effectively prevents the individual from extracting retained earnings from their corporation on a tax-free basis using the lifetime capital gains exemption. By doing so, it ensures that taxpayers cannot use linked corporations to, in effect, remove earnings from their corporations using a contrived sale.
I think all honourable senators would agree that our aim should not be to encourage the use of contrived sales to game the system, particularly those of us who have had experience working in the financial sector. Rather, we should be seeking carefully designed measures to support the genuine intergenerational transfer of family businesses. In this regard, it is important to note that there is currently nothing in the act preventing a parent from selling their shares of the family business directly to their child or grandchildren on a tax-free basis using the lifetime capital gains exemption. In fact, the act currently shelters up to $1 million in capital gains on qualified farm and fishing property.
The issues that Bill C-208 aims to address arise only in multi-tiered corporate structures where one corporation owns a second corporation.
To summarize, while this bill creates planning opportunities that can be used in an intergenerational transfer of a business, it lacks appropriate safeguards to ensure that it is only used for that purpose. There is nothing requiring the parent to cease or wind down running the business. The child is not required to play any role in running the business. In fact, right after extracting the surplus, the child could sell their holding company to the parent for a nominal amount, cutting them out entirely.
Unfortunately, as I believe I have tried to articulate, Bill C-208 would open the door to new tax avoidance opportunities that would unfairly benefit wealthy individuals. In the end, it would provide up to $900,000 tax free to many wealthy taxpayers, or up to $1.8 million for couples who do not transfer any aspect of their business to their children.
Bill C-208 also proposes problematic amendments to section 55 of the act. This section restricts corporations from inappropriately reducing their taxes by paying excessive tax-free dividends between corporations, which in the absence of these restrictions would be taxed as capital gains. This form of tax avoidance planning is known as capital gains stripping.
Bill C-208 poses problems insofar as it affects two exemptions to these anti-avoidance rules. These exemptions authorize businesses that are restructuring, in recognition of their special circumstances, to defer capital gains taxes. The first exemption applies to the restructuring of related corporations, and the second applies to all corporate restructurings.
Bill C-208 would broaden that first exemption so that it applies to brothers and sisters, in breach of the long-standing principle of tax policy that brothers and sisters are considered to have separate and independent economic interests for these purposes.
Changing this exemption would increase the scope for abuse and erode the tax base. By doing so, it may create a problem larger than the one it seeks to address. That’s in part because spouses, as well as parents and their children, are already eligible for this exemption because it is presumed that they have shared economic interests.
Although brothers and sisters cannot restructure their participation in a corporation on a tax-deferred basis under the related corporations exemption, they can do so under the second exemption of section 55, which applies to all corporate restructurings.
There are fewer tax avoidance opportunities under this so-called “butterfly exemption,” but if Bill C-208 were to be adopted, siblings could undertake business restructurings in which otherwise taxable capital gains realized between corporations would be converted into tax-free intercorporate dividends. This would create new opportunities for tax avoidance in Canada.
Honourable senators, Bill C-208 as currently structured would enable loopholes within the tax system that create opportunities for tax avoidance by the wealthy at the expense of those these measures should rightfully support. Respectfully, for all the reasons I have outlined, I cannot support Bill C-208.
Thank you.
Would Senator Gold take a question?
Absolutely.
As you mentioned in your speech, in December 2019, in his mandate letter to the Minister of Finance, the Prime Minister asked him to address this inequity.
Now when you talk to us about these transfers, you have a lot to say about multi-tiered corporate structures, operating corporations and holding companies. Would you agree that, since Bill C-208 limits the capital value of the business to $15 million, these are not multinationals or companies that can afford to pay for legal services and tax services? We are talking about small family-owned businesses. Since we can limit these business transfers to children, for small- and medium-sized businesses that have a maximum value of $15 million, and since the child must hold this capital value for a minimum of five years, don’t you think these are sufficient safeguards to promote an environment that’s more conducive to transferring our small businesses rather dismantling them?
Thank you for the question, colleague.
As I said at the beginning of my speech, this bill seeks to fix a major problem, one that the government acknowledges. As I tried to explain in my speech, the bill does not include enough safeguards to ensure that potential abuse can be prevented.
It is an important bill because the Prime Minister entrusted the responsibility for addressing this inequity to the Minister of Finance in his mandate letter in December 2019, 19 months ago.
Can we agree that Quebec has proposed some interesting and innovative solutions to correct this fiscal imbalance and that, if any abuses or loopholes are detected during the implementation of Bill C-208, sections 245 and 246 of the Income Tax Act on tax avoidance provide the legislator with all the necessary tools to make the changes and corrections needed to close these loopholes? Do you agree with me on that?
Thank you for the question.
According to the information I have and the testimony of officials from the Department of Finance, there is still a problem with the current bill. That is why, as the Government Representative in the Senate, I wanted to express the government’s point of view in this chamber in order to share its concerns about this bill.
It’s actually the point of view of officials from the Department of Finance, but the majority of elected members in the other place, from all parties, voted in favour of passing Bill C-208.
Thank you very much.
Senator Gold, you stated that this comes at a considerable cost. We asked that of the Finance officials in the Agriculture and Forestry Committee meeting. They were not able to provide us with any estimate of the considerable cost. We know this is already having a punitive effect on family transfers of small businesses, family farms and fishing operations, but there isn’t an estimate available to us about the cost. Can you expand on that, please?
Thank you. Again, I want to repeat that the government fully understands the intent of this bill and accepts that there are inequities in the tax system that this bill seeks to address. That is not at issue. The challenge in estimating the cost is that the cost and the impact on the fiscal framework will be a function of the extent to which people take advantage of the loopholes that I tried to describe or the lack of safeguards to engage in activity, dividend stripping or the like, that they would otherwise not be able to do in the absence of this bill.
In that regard, the estimation of the potential impact requires one to speculate as to how the tax-advising industry and the owners of businesses who have or have decided to set up multi-corporate structures to take advantage of what this bill would allow. In that regard, I think the officials were not able to provide a figure because it depends on how many owners take advantage of the measures contemplated in this bill in an inappropriate way, as opposed to an appropriate way.
Senator Gold, are you aware that in the House of Commons Committee on Finance, the Finance officials offered that regulatory power could be used and added by the government at a later date if this turned out to be a significant issue? That was confirmed as well by the long-standing chair of the Finance Committee in the other place, Wayne Easter. I’m just wondering if you’re aware of that fact.
Yes. Thank you for that question. I am aware, of course, as all legislators are aware, that it is always possible to further legislate to address, amend or correct issues in legislation that arise or that appear on the face. I believe that issue was also addressed at the committee.
Honourable senators, this is the first day of third reading debate on this bill, a private member’s bill. I want honourable senators to understand the importance for us, as the chamber of sober second thought, to have available the government’s position on this private member’s bill, in this regard, through my speech.
You’re perfectly correct, Senator Deacon, that there are opportunities and would-be opportunities in the future for the problems that I have outlined to be addressed. But I think it’s only prudent and responsible that the chamber be aware of these problems in the course of the debate.
Thank you, Senator Gold.
Would Senator Gold take a question?
Yes, of course.
I respect your speech and the fact that nobody wants tax loopholes. We fight so hard to avoid tax evasion. That is important to all of us. But are you aware that the accounting community largely supports this bill? There is huge support behind this bill. We have a restriction — a whole period of five years — we have the fact that partial sales are not allowed, and, as Senator Forest mentioned, it is strictly for small businesses. I’ve always said that trust is the currency of every relationship. Why could we not trust our small- and medium-sized businesses to move forward and adjust accordingly in the future?
To your question, senator, yes, I am aware of the support of the tax community. As I said, I’ve simply used this opportunity to register the government’s concerns and to explain why I cannot support this legislation.
Will Senator Gold take another question?
Yes, of course.
Thank you. Senator Gold, we have learned that in the other place all three parties — or four parties, but three at least — did not support the government’s view. I’m wondering if you could enlighten us as to why that might be. You have a compelling argument, I would say. Loopholes are an argument that would certainly appeal to at least two of the three major parties in the other place. I wonder if you could enlighten us as to why the government didn’t get support from at least one of the other parties to help you with your argument. Thank you.
Thank you. I really don’t know the answer to that. This was a private member’s bill. In that regard, it was supported by members of the Liberal caucus, as it was with other members. There is no question that it addresses a real problem, whether with constituencies or communities, with farming businesses or fishing. I totally understand the support of this bill.
I respect, of course, the work of the other place. I also respect our role as senators, which is to give our own perspective on legislation, as we have done and are doing so here. That’s why I feel it appropriate to have registered my concerns.
I’m always happy to answer questions, but I know that there are other speakers who wish to speak, so I will end my answer this way and hope we can move on in the debate.
Will Senator Gold accept one more question on this topic?
Yes, thank you.
Senator Gold, I had no intention of involving myself in this debate, but I am bamboozled, quite frankly, by the Government of Canada’s position on this. Let me offer not so much a detailed question — I agree with your point about people engaging in inappropriate tax avoidance, but almost all other aspects of the Government of Canada have articulated that agriculture and agri-food is one of the critical pillars of prosperity going forward in this country. Speaking not so much for fisher people but for farmers, it’s agreed across the piece that this is a feature that can strengthen our agricultural community.
I would have thought that the Government of Canada, through you, would have shown up not with opposition but with suggestions to fence around that avoidance so we would have success here rather than opposition. I guess I just don’t understand why we’re not hearing from the Government of Canada a suggestion, for example, for an amendment or two that could make this work the way the Government of Canada thinks it should. Thank you.
Thank you. It’s a fair question. My understanding, and what I took from the testimony of the officials at the committee, was that although this is an issue that is being worked on, it’s complicated. You might have been a better law student than I was when it came to tax; I barely got through by the skin of my teeth. But it’s a very complicated area.
They weren’t ready, notwithstanding that it is in their mandate and they’re working on it. Therefore, it would be presumptuous of me representing the government, without instructions from the government, to offer amendments when, in fact, the officials aren’t ready.
This is a question of timing, perhaps, but here we are. I wanted and am duty-bound to register the government’s position. But thank you for the question. It’s a fair question for sure.
Honourable senators, I am pleased to add my voice to the debate on Bill C-208.
I would like to thank Senator Griffin for her leadership on this bill, as well as other senators who have spoken to it.
The impulses behind this bill are laudable. We can all agree on the importance of tax fairness, family farms and a healthy and thriving agriculture and fisheries sector. This bill, however, has moved through the Senate extremely quickly, to the point where we are now on the precipice of the third reading vote. I fear we have gone too quickly and have not put in the requisite scrutiny to allow for a well-informed decision.
I note, for example, that the bill was sent to committee after only two second reading speeches. With due respect, the second reading speeches were detailed in their coverage of the specifics of the bill, but they were light on its principles and the broader implications.
At committee, there was strong support for the bill from the farming, fishing and accounting communities, all of which will, of course, benefit from the proposed amendments. But there were serious reservations raised by Department of Finance Canada officials, none of which came out in the report from the Standing Senate Committee on Agriculture and Forestry — not even in observations. Those reservations were brushed aside in what appears to have been a rush to get to clause-by-clause consideration. The report provides us with none of the nuance that was heard in committee, and it conveys the impression that this bill was given a clean bill of health.
Before you vote on this bill, colleagues, I ask that you at the very least read the transcripts of the Agriculture and Forestry Committee hearings and pay attention to all of the testimony, including the reservations expressed by Finance Canada officials.
The gist of their reservations — and here I am repeating a bit of what Senator Gold has said — is that the proposed amendments will open tax avoidance opportunities that go well beyond fishing and farming operations. For example, there are no safeguards in the bill as written to prevent a family member from setting up a corporation that receives shares of a farming business from a parent or grandparent and then turning the business back to the parent or grandparent to run. In doing so, the tax savings could be considerable, but it should be clear that the intent of such an action is not the intergenerational transfer of family farms or fishing corporations; it is tax avoidance, plain and simple.
Some of you might think that a little bit of tax leakage might be a price worth paying for the preservation of family farms and fishing operations, but consider the following: This bill covers all qualified businesses, not just farming and fishing operations. The PBO has estimated that there were 1,674,310 qualified businesses in 2014, of which 50,000 were farming corporations and 4,000 were fishing corporations. You can do the math, colleagues, but that means that farming and fishing corporations make up a mere 3% of eligible, qualifying businesses. That percentage is likely overstated, because the number of farming and fishing operations has likely fallen relative to the total number of qualified enterprises over the last seven years.
This bill will open tax avoidance opportunities not just for the 3% of farming and fishing operations that we seem to be focused on, but also for the 97% of other corporations that are eligible.
Given that this bill was studied in the Agriculture and Forestry Committee, there was very little attention paid to the potential users and abusers of the proposed exemption on non-primary-sector corporations. Perhaps the bill should have been studied in the Finance or Banking Committees.
It is too late now, but there is no question in my mind that there have been some major omissions in our collective scrutiny of this bill.
Even if this bill were solely focused on farming and fishing operations, the removal of an anti-avoidance measure opens the door to more aggressive tax planning well beyond those sectors. Surplus-stripping, or asset-stripping, is an issue that affects all corporations in all sectors, which is why an exemption allowing for such in one sector will provide fodder for litigation in other sectors, making it much harder for the CRA to defend anti-avoidance measures in all areas of the tax code.
I understand that this bill is framed as an issue of tax fairness; that a sale of corporate assets to family members should be treated in the same way as a sale to third parties. There is a logic to this view. But selling to family members, dear colleagues, is, by definition, not an arm’s-length transaction. Unless we are prepared to say that related-party transactions are arm’s-length transactions, we simply cannot treat the two in the same way. To do so would undermine a key principle in tax policy, with potentially far-reaching unintended consequences.
Some of you might recall that we had a similar discussion in 2017 when we debated a provision in the budget implementation act to limit the ability of Canadian-controlled private corporations, or CCPCs, to “sprinkle” shares to family members. The “sprinkling” of shares was defended on similar grounds to the ones that we are hearing on this bill: It was a way for owners of private corporations — often doctors and lawyers — to retain surpluses in the family as a form of savings for retirement. It’s a very similar argument. We rejected those arguments in 2017, and I believe rightly so, because of — wait for it — tax fairness.
We should reject this bill on similar grounds.
It might be possible to design an amendment or a bunch of amendments that protect against some of the unintended consequences of this bill. We heard a number of ideas in committee about how that might be done. But here, again, there was no attempt to explore these options further, either in committee or in observations that accompanied the report.
I would add that the issue of tax fairness, fundamentally, is a function of the differential between the tax treatment of capital gains and dividends, which currently stands at a high of about 20 percentage points. It depends upon which province you are in. That differential is a matter of policy, and it can be narrowed by changing the tax rates on either side, capital gains or dividends, with potentially positive implications for reducing income and wealth inequality in this country.
But that option was not explored in this committee, and understandably so, because it was the Agriculture and Forestry Committee. But that reinforces my earlier point that perhaps we should have asked the Finance and/or Banking Committees to also take a look at this bill.
Finally, this bill has been touted as a solution to the problem of the disappearing family farm. I’m very sceptical about this proposition. The diminishing number of family farms in this country has much more to do with business models than it has to do with the tax code. If anything, transferring a loss-making farm corporation within the family could simply mean transferring a loss-making operation from one generation to the next.
Colleagues, Canada has lost one third of its farmers and two thirds of its young farmers in just a single generation, but that is not because of tax policy. This is confirmed by studies on the changing nature and structure of agriculture in Canada. In Ontario, for example, for every dollar spent on farmland in the 1970s, that farmer could hope to generate 4.7 cents in net returns. That number has fallen to about 1 cent in the last decade.
It is a similar story in Manitoba. In the 1970s, a dollar spent on farmland would, on average, yield 8.7 cents in net farm income. Over the past two and a half decades, a combination of falling net incomes and rising land prices has created a situation where Manitoba farmers today generate just 2 or 3 cents for every dollar they spend on land.
Let me put it a different way: There has been a large reduction in the number of farms in Canada, from approximately 300,000 a generation ago to roughly 200,000 today. Realized net farm income over the most recent decade averaged $3.5 billion annually. Let’s assume it takes $75,000 in net income to support a family. That means that $3.5 billion in aggregate income annually for the sector as a whole can only support 47,000 farm families — but we have 200,000. The reality for most Canadian farm families is that they operate in a sector that simply cannot financially support them.
The problem of low net incomes of family farms is complicated, and it has to do with the structure of modern agribusiness. It will not be altered overnight. Any policy that facilitates the transfer of farm assets within the family, but does not address some of these structural issues, will do little to stem the decline in family farms.
One could even argue that transferring a farm corporation outside the family could be better for that farm if the new owner brings a better business model to its operation. I’m not necessarily referring to an anonymous megacorporation, but it could be another family that wants to enter the business with new ideas about how to make it work. Intergenerational transfers are not the only means to retain farms that are operated by families.
I heard the view expressed in committee that even though this bill is flawed, we should pass it anyway because doing so will spur the government to come up with the regulatory fixes that are needed, or even come up with a new law that properly addresses the issue. Colleagues, that amounts to saying that we should pass a flawed law in order to get a good law — not a good law that is imperfect, as we often deal with, but a flawed law to start with. I don’t think that is a good way to think about our role as a chamber of careful reflection and deliberation. In fact, I think that is an irresponsible approach to legislation.
I also understand that many of you are responding to calls from your constituents to vote in favour of this bill. No surprise here, given that there are perhaps 2 million qualifying enterprises in the country that could benefit from the bill. By the way, 97% of them are not farming or fishing operations. Each of us will have heard from a business that is affected. The fact that MPs in the other place would feel pressure to respond to a populist bill is understandable, but I would like to think that we are less vulnerable to such pressures.
We, of course, must be responsive to the people and regions we represent, but the very nature of the Senate allows us to look at the bigger picture, take the longer view and resist measures from the other place that do not meet the test of national interest.
Honourable senators, there have been many speeches in this chamber over the past years railing against tax avoidance or what some might call aggressive tax planning. This bill works in the opposite direction. I have no doubt that it will encourage tax avoidance and aggressive tax planning. If you think that is okay because we’re only talking about small businesses rather than megacorporations, my response is that the tax code should operate on the same principles regardless of size.
Not only that, but the notion that this bill is mostly about mom-and-pop businesses is erroneous to start with. The exemptions proposed under this bill allow for intergenerational transfers of up to $15 million in tangible, taxable capital. According to Statistics Canada, in 2011, less than 0.5% of all privately owned corporations with fewer than 500 employees had assets greater than $7 million. That means more than 99.5% of private corporations, under this definition, will be covered.
I will sum up. The case for this bill is built on two propositions: Tax fairness and the protection of family farms and fishing operations. Both are worthy goals, and I commend my colleagues for their advocacy on these issues. However, this bill is flawed for three key reasons: it cannot truly address tax fairness without properly closing surplus extraction opportunities in related-party transactions; family farms and fishing operations constitute only a very small portion of the businesses that would be captured by this exemption; and it does not address any of the structural problems facing family farms and could in some ways even accelerate the decline of that sector.
I wish we could take more time to properly study this bill. However, if we do not have the luxury of more time, I hope you will join me in rejecting it. Doing so would not be a rejection of tax fairness or family farms. It would be an affirmation of our role as legislators who take the broader view and who can resist measures that may be popular but which are not in the public interest.
Thank you.
Senator Housakos, do you have a question?
Would Senator Woo take a question?
Yes, of course.
I have been listening to the debate attentively. I’m trying to wrap my head around the government’s perspective on this — and, quite frankly, yours as well. In essence, what I understand is this: Let’s punish millions of law-abiding citizens for something non-law-abiding citizens may or may not do. At the end of the day, those of us that have been in business and in the field of accounting recognize there are plenty of loopholes with Revenue Canada already if somebody doesn’t want to be a law-abiding citizen and pay their taxes.
I find it difficult that we are not being responsive as a Parliament — and our government isn’t being responsive — to something that touches millions of Canadians. I want to touch upon my question on the main focus of your speech. You talk about tax fairness, Senator Woo. Currently, if a Canadian wants to sell their small business to a family member, it will cost that family member significantly more in taxes than it will for a stranger. In your opinion, is that tax fairness?
Thank you, Senator Housakos, for the question. The underlying question here is whether a sale within the family is considered a related-party transaction. It’s a well-established principle within tax law that transactions within the family are related-party transactions. That is why there is a difference in the treatment of the sale within the family — or transfer of assets or giving of dividends — compared to the transfer of assets — or sale or giving of dividends — to an external third party. Unless we are willing to overcome or to deny this principle in tax law, we will have a challenge in reconciling the difference that you highlighted.
We have heard from the government that they want to try to address this problem, but it is a very troubling one and will require a lot more work to, on the one hand, respect the fact that related-party transactions have to be dealt with in a special way, but at the same time to try to accommodate the interests of small businesses, particularly family farms and fishing operations, that genuinely want to keep the business within the family.
Senator Woo, don’t you think it would be more reasonable to address the inequity right now in the system as it stands and encourage our government to continue the pursuit of closing tax loopholes, which seems to be a pursuit that has been going on now for decades with very little success?
Thank you for the question. If you paid attention to Senator Gold’s speech or listened to the testimony at the Standing Senate Committee on Agriculture and Forestry, you will know that, in fact, there are mechanisms currently for farmers and fishers to transfer their businesses in a graduated way using the 10% reserve that is allowed to them over time and not have to pay taxes at the higher rate.
That means basically selling directly to the children rather than through the corporate structure and phasing it out in the way that I believe one of our colleagues Senator Loffreda alluded to. They could phase it out so that the children or grandchildren can take a little more time to learn the ropes, if you would, and acquire the skills needed to run the business.
So there are ways in which it can already be done, and we should pay attention to those mechanisms rather than pass a flawed bill that will, first of all, affect way more than just family farms and fishing operations and, second, will inevitably open up opportunities for tax avoidance.
Would Senator Woo take a question?
Certainly.
You gave a good explanation of the problems with how the primary sectors, in particular the agriculture and fishing sectors, are structured. The situation is even more problematic because both of these sectors operate with production quotas. You didn’t mention that, but it is part of the reality.
The value of a business and that tax unfairness is what pushes people in these sectors to dismantle their businesses. This means that they sell their quotas, their herds and their equipment instead of transferring them. There are three aspects of the bill that seem important to me right now. You mentioned them as well. The first is the maximum capital amount of $15 million. The second is the requirement that the owner sell to their children and not to extended family members. The third is that the buyer must keep the business in operation for at least five years.
I think we should think about the structural issues with the agricultural and fishing sectors, especially for SMEs. However, don’t these three aspects give us at least some assurance that we might achieve our objective, which is to eliminate the existing tax unfairness between a transaction between members of the same family and a transaction between people who have no family ties?
Thank you for your question, Senator Forest.
On the question of tax fairness, as I said, there is a logic to this bill that tries to create an equilibrium between sales to family members — children or grandchildren — versus sales to third parties. But the reason there is a disequilibrium — I have said this already, but the fundamental reason we are in this place in the first place is because sales to family members are related-party transactions. That’s the starting point. Of course, we could wave that away. We could say, “Forget it. Let’s just say that transactions between families are not related-party transactions.” That would upend the entire tax code. It would be extremely problematic and would open up litigation not just in this area but in a whole bunch of other areas that I have no clue about but I’m sure exist that deal with the question of related-party transactions.
There are different ways of looking at tax fairness, Senator Forest. I believe that this bill looks at it from the very narrow perspective of one transaction comparing a sale to family members to a sale to third parties without fully appreciating the underlying problem that any sale to a family member is treated in a way that has to be given special consideration because it’s a related-party transaction.
I appreciate your comment about the bigger structural issues facing the farming and fishing sectors. This is an issue that I hope our Agriculture and Forestry Committee will really wrap its arms around and tackle in a really cold-eyed way, looking not at solutions that help incumbents make it to the finish line, if I can put it that way, perhaps continuing to perpetuate inefficient operations, but to look at the system as a whole and how to make it viable for farmers, for suppliers of agricultural equipment and for consumers as well. This kind of bill, trying to fix one small gear in a very complex machine, could actually make the machine function less well. And that’s why even if you like this bill for the tax fairness function, I do not think that the argument that this is good for the farming sector as such holds up. The farming sector faces much more severe problems that will not be solved by these changes to the tax code.
