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Positive tax changes ahead for family-run businesses, farms and fisheries
By Am Lidder Senior Vice President, Tax Services
On June 29, 2021, the Private Member’s Bill C-208 received Royal Assent. Bill C-208 provides for the intergenerational transfer of certain family businesses, farms, and fisheries to receive the same tax treatment as businesses sold to a third party. Bill C-208 represents a significant positive change to support family business succession in Canada. However, as outlined below, there is a tight window in which businesses can act, which is prior to November 1, 2021.
- Bill C-208 allows the intergenerational transfer of certain family businesses to receive the same tax treatment as businesses sold to a third party.
- Bill C-208 also provides for positive changes around the division of a family business amongst siblings.
- Businesses contemplating an intergenerational transfer should reach out to their MNP Advisor as soon as possible to act prior to November 1.
Previously, a long-standing anti-avoidance rule in the Income Tax Act (ITA) treated intergenerational transfers of a business as a dividend rather than a capital gain. Bill C-208 changes that rule to allow access to the lifetime capital gains exemption (equal to approximately $225,000 - $250,000 of tax savings per taxpayer) and also provides for positive changes around the division of a family business amongst siblings.
The latest on Bill C-208
There has been significant activity surrounding the Bill as numerous announcements were released, including:
- On June 30, 2021, the Department of Finance announced that it intends to introduce legislation to clarify that the Bill C-208 legislation would apply at the beginning of the next taxation year, effective January 1, 2022. This announcement created much uncertainty amongst Canadian business owners as traditionally, legislative changes that do not have an application date become law from the date they receive Royal Assent.
- On July 19, 2021, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, confirmed that the legislative changes contained in Bill C-208 apply in law and replaced the June 30 news release.
The most recent announcement has provided some clarity on the ability to use the Bill C-208 legislation as currently written. However, as indicated in their July 19 news release, the Government intends to bring forward legislative amendments to the ITA that honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes that may have been created by Bill C-208.
One loophole that Bill C-208 may inadvertently permit is the opportunity for “surplus stripping,” in which dividends are converted to capital gains to take advantage of the lower tax rate, without any genuine transfer of the business actually taking place, thereby compromising the integrity of the tax system.
These forthcoming amendments to Bill C-208 will address the following:
- 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.
The draft legislative amendments will be brought forward for consultation. Final legislative proposals would be introduced in a bill and apply as of the later of either November 1, 2021, or the date of publication of the final draft legislation.
As noted in our previous Tax Alert, taxpayers must provide the Canada Revenue Agency (CRA) with an independent assessment of the fair market value of the shares transferred and an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares.
It is important to note that the province of Quebec already has legislation with respect to intergenerational transfers, however the legislation is much more restrictive. There still may be scenarios where there is alignment with both Bill C-208 and the provincial rules in Quebec.
What this means for you and your business
Bill C-208 legislation provides for intergenerational transfers of shares of small businesses or family farm and fishing corporations until November 1, 2021 (at the earliest). Businesses contemplating an intergenerational transfer should reach out to their MNP Advisor as soon as possible.
The surplus stripping loophole has been widely publicized. It is important to note that the CRA has the tools (including the valuation report and signed affidavit related to the shares transferred) and ability to reassess and apply anti-avoidance provisions where a transaction does not meet the object, spirit and purpose of the ITA. With the lack of clarity relating to the consequences of and risks associated with using the new legislation outside of its intent, MNP believes all Bill C-208 planning solutions should be in contemplation of an intergenerational transfer of a business.
For more information on the legislative changes announced in Bill C-208, please see MNP’s previously published Tax Alert: Bill C-208 approved.