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The Liberal chair of the Commons finance committee is calling a special one-day sitting next week to sort out the confusion over whether the Finance Department can freeze small-business tax breaks that have already received royal assent in Parliament.

Wayne Easter, the Liberal MP who chairs the finance committee, said in an interview he was “surprised and shocked” when Finance issued a press release on June 30 stating that more generous tax treatment for intergenerational transfers of small businesses would not take effect until the new year, even though the private member’s bill had received assent the day before.

Under the federal Interpretation Act, legislation comes into force once it receives royal assent, unless a commencement date is specified. But Finance asserted it could delay the enactment of C-208 since it did not specify a commencement date.

For Mr. Easter, that assertion raised questions about parliamentary supremacy that need to be addressed immediately.

“I’m certainly of the opinion that Parliament is supreme,” Mr. Easter said.

He is taking what he says is an unusual step of convening a committee hearing while Parliament is adjourned, with the Commons law clerk and Finance officials scheduled to appear.

“If you allow the cabinet or the department to take authority on their own, then you’re weakening your own power as an MP and that of Parliament. And we can’t have that.”

Finance Department defies precedent, says it can delay law that eases tax burden for small businesses

Several legislative experts contacted by The Globe and Mail had the same opinion: that Parliament’s will, once formally expressed through royal assent, cannot be ignored. Former House of Commons law clerk Rob Walsh reiterated his view in an interview Tuesday that it is clear the law came into effect when given royal assent.

Bill C-208 reduces the tax burden on owners of small and medium-sized businesses who want to pass on their companies to family members. It allows those business owners to claim proceeds from the sale of shares to an adult child or grandchild as capital gains, rather than as dividend payments. Capital gains are taxed at a lower rate, and in some cases a taxpayer can use a lifetime exemption to avoid paying any tax at all.

In its June 30 press release, the Finance Department said the government intends to introduce amending legislation ahead of Jan. 1 that would “facilitate genuine intergenerational share transfers, while preventing tax avoidance.” Parliament is not scheduled to sit again until mid-September, with speculation building about a fall election. If the Liberals win a majority, the government could then recast the small-business tax legislation to the government’s liking in time for the Jan. 1 deadline. (Bill C-208 passed with support from several Liberal MPs, including Mr. Easter.)

The finance committee hearing is to take place on July 20, with the House of Commons law clerk, Philippe Dufresne, to be called before the committee in the morning to provide his views on Parliament’s supremacy on the matter and on when a bill such as C-208 comes into force. Each of the four parties represented on the committee will also be able to put forward a witness in the morning session, Mr. Easter said.

In the afternoon, officials from the Department of Finance have been asked to appear to explain what they meant by issuing the June 30 press release. In addition, Mr. Easter said, the committee will attempt to clarify what rules apply to small businesses that enact intergenerational transfers before Jan. 1, and whether such transactions would result in retroactive tax bills. “There’s no question they’ve confused people.”

Mr. Easter said he is “pretty confident” that officials will attend, although he notes the committee has subpoena powers.

The Finance Department did not have an immediate comment.

However, Finance officials did express concerns when they appeared before the Senate agriculture and forestry committee in mid-June that the tax changes would be abused. Trevor McGowan, a director-general at the department, said then that the legislation would create a loophole that would allow small-business owners to transfer shares for the purpose of reducing their tax obligations, not for a genuine transfer of their business.

However, Mr. Easter said accounting experts who appeared before the Commons finance committee said the legislation is “airtight.” Mr. Easter added he had also asked the Finance Department to propose language that could be used to close any loophole that it believed to exist. The department never took him up on that offer, he said.

The Canadian Federation of Independent Business, the Canadian Chamber of Commerce, the Canadian Federation of Agriculture and Western Canadian Wheat Growers have all said they are concerned about the delays in enacting Bill C-208 and have called on the Finance Department to reverse course.

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