The tax on a family business transfer was lowered on June 30th when Bill C-208 became law.
That might not last.
The liberal government is already proposing changes. The bill, introduced in the House of Commons earlier this year by Manitoba’s Conservative MP Larry McGuire, makes it easier for a fish collector or farmer to pass the business on to the next generation by lowering the taxes paid on the transaction.
In a testimony to a standing parliamentary committee earlier this year, Maguire stated that the difference between the selling price and the original price counts as a dividend when one family member sells a business to another family member.
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However, if they sell the company to a stranger, the difference is counted as a capital gain.
Bill C-208 introduced changes to reduce the tax burden on family businesses that wish to transfer ownership to their children. – File photo
A capital gain is taxed at a lower rate and the seller can use their lifetime capital gains tax exemption to further reduce the tax paid.
Maguire cited the sale of a $ 1 million farm as an example.
Selling it to a stranger would count as a capital gain, and the farmer would pay a tax of 13.39 percent on every increase in the value of the farm since the first purchase. If the farmer sold it to a child or grandchild, the increase in value would be considered a dividend and taxed at a rate of 47.4 percent, Maguire said.
The bill was approved by the committee phase and third reading in the House of Commons in May, passed by the Senate in June, and received royal approval on June 20.
But a June 30 press release from the Treasury Department caused some confusion, stating that the bill makes changes to the Income Tax Act but does not include an application date.
In that press release, the ministry pointed out that the federal government had proposed introducing a law to make it clear that the changes would apply at the start of the new tax year from January 1, 2022.
Not only family farms and fisheries will benefit from the new tax laws. The rules apply to all family businesses, and the Liberals see some loopholes there. – File photo
Almost three weeks later, on July 19, Chrystia Freeland, Deputy Prime Minister and Treasury Secretary, issued another press release confirming that the legislative changes in Bill C-208 are now law.
According to a report in The Western Investor, Freeland overturned the June 30 ruling and a press release from Treasury officials saying “The law is the law” and all aspects of Bill C-208 are now in effect.
However, in her press release, Freeland also said the bill may have inadvertently created the loophole to allow for “excess stripping.” There dividends are converted into capital gains to take advantage of the lower tax rate without actually actually transferring the business.
That would jeopardize the integrity of the Canadian tax system, Freeland said.
The Liberal government therefore intends to submit draft legislative amendments for consultation.
“The changes we’re trying to make will respect the law passed by Parliament, ensure everyone pays their fair share, and support the families and small businesses that keep our economies and communities strong,” Freeland said in a press release.
According to the Treasury Department, the changes would address some of the following issues:
• The need to transfer legal and de facto control over the company running the business from the parent to their child or grandchild;
• The ownership interest in the managing company that the parent company may retain for a reasonable period of time after the transfer;
• The requirements and timeline for parents to transfer their stake in the business to the next generation; and
• The degree of involvement of the child or grandchild in the business after the transfer.
Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), has publicly signaled that he is cautious about fiddling with the law. CFIB has been advocating changes to tax laws on this issue for years.
Kelly told Advisor’s Edge magazine he had no problem with the finance department trying to make sure the rules protect the integrity of the tax system, but said it should have done so while the bill was going through the parliamentary process.
“This [delay] seems like an attempt to just kick the can forward in the hope that everyone will forget that Parliament passed a law – and that it passed a law after one [possible] Election campaign in autumn. “
The press releases from the finance department also made another politician think.
With these words, the government tried to reverse its bizarre attempt to repeal a law that both Houses had passed!
“We fully support genuine intergenerational share transfers and we regret the recent uncertainty we have caused. Bill C-208 was voted by Parliament and …
– Senator Pamela Wallin (@SenatorWallin) July 20, 2021
Pamela Wallin, who was appointed to the Senate by former Conservative Prime Minister Stephen Harper in 2009 but now sits as an independent senator, claimed in a July 20 tweet that the Liberal government “was trying to stop its bizarre attempt to repeal a law that “Passed both houses!”
“Hold on,” she tweeted.