C-208 now in force: federal government scraps delay in implementing tax changes for intergenerational transfers
The federal finance department has scrapped its plan to delay implementation of legislation passed by Parliament that would reduce the tax burden for intergenerational transfers of small businesses, such as family farms.
Bill C-208, the private member’s bill that was sponsored by Manitoba Conservative MP Larry Maguire, received Royal Assent before Parliament rose for the summer on June 29.
The following day, the department of finance issued a statement saying it would delay implementation of the bill until January 1, 2022, potentially with amendments, despite Canadian law and legislative experts saying the bill took effect immediately after receiving Royal Assent.
Farm groups and politicians, including some Liberal MPs, raised concerns about the finance department’s unprecedented delay in following the will and authority of Parliament.
One of those MPs, finance committee chair Wayne Easter, called back the House of Commons finance committee to bring some clarity to the issue in a meeting on July 20, with witness testimony from finance officials, legislative experts, and representatives from the Canadian Federation of Agriculture and Quebec Federation of Young Farmers.
The course reversal from the Liberal government was announced just prior to the finance meeting on Tuesday, July 19.
“Bill C-208 was voted on by Parliament and received Royal Assent. The law is the law,” said Finance Minister and Deputy Prime Minister Chrystia Freeland, in a statement released late Tuesday.
The bill was designed to address a long-standing issue of it being more costly from a tax perspective to transfer an incorporated business to a child or grand-child’s corporation than to a third party, due to the proceeds being categorized as dividends rather than a capital gain.
“Our concern is with technical elements of the bill that could unintentionally present opportunities for tax avoidance,” said Freeland, noting the government plans to bring forward amendments to Maguire’s bill. “The amendments we intend to bring will honour the law passed by Parliament, make sure everyone pays their fair share, and support the families and small businesses that keep our economy, and our communities, strong.”
The finance department says it is concerned C-208 could create a loophole for “surplus stripping,” where corporations owned within the same family could convert dividends to capital gains to benefit from a lower tax rate without a legitimate business transfer taking place.
The government says its amendments would be aimed at addressing the following issues:
- The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
- The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;
- The requirements and timeline for the parent to transition their involvement in the business to the next generation; and
- The level of involvement of the child or grandchild in the business after the transfer.
It’s not clear why such amendments, if they were a concern, were not tabled during the legislative approval process, which extended over 16 months in the House of Commons and Senate.
Speaking to the finance committee on Tuesday, Canadian Federation of Agriculture president Mary Robinson said CFA is “pleased to see yesterday’s announcement provide some additional clarity, both for the immediate future and for the government’s longer term plans in this regard.”
She also called for dialogue with farmers and farm advisors in coming up with the government’s planned amendments to C-208.
“The potential for unintended barriers is significant, unless informed by those with direct experience managing farm succession and financial planning…” she noted. “We call on the government and Parliament to ensure the inequity Bill c-208 resolves is not reintroduced, and that Canadian family farms are never again disincentivized for selling to the next generation by the Canadian the tax system.”