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The Liberal cabinet, not the Finance Department, decided to delay the implementation of new tax breaks for small businesses, a senior Finance official told a special sitting of the House of Commons finance committee on Tuesday.

Legislative experts say Bill C-208, which gives more generous tax treatment to intergenerational transfers of small businesses, came into effect on June 29, the same day it received royal assent. But, on June 30, the Finance Department issued a brief press release asserting that the provisions of the private member’s bill would not apply until Jan. 1. The delay appeared to violate parliamentary convention and the federal Interpretation Act, which states that bills come into effect on the day of royal assent unless otherwise specified.

The government faced criticism over the move, and the Liberal chair of the finance committee, Wayne Easter, scheduled Tuesday’s one-day special session to examine the resulting confusion. On Monday, the government backtracked, with Finance Minister Chrystia Freeland issuing a statement that acknowledged the tax changes took effect on June 29.

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At the finance committee hearing on Tuesday, department officials said although the announcement came from the Finance Department, it was the Liberal government that made the original decision to assert the bill would not come into effect until Jan. 1, and to introduce amendments before that date.

“The minister made her decision and it was implemented,” said Trevor McGowan, director-general in the tax legislation division of the tax policy branch of the Finance Department. He and other finance officials would not identify the minister, but Ms. Freeland as Finance Minister is the politician in charge of the Finance Department.

The Finance Department did not respond directly to an inquiry from The Globe and Mail about whether Ms. Freeland is the minister in question.

The session wrapped with members voting to invite Ms. Freeland to appear before the committee within the next two weeks.

Ottawa scraps delay on law giving small businesses tax breaks after storm of criticism

Finance committee recalled to address confusion over delay to small-business tax breaks

Speaking in Quebec on Tuesday, Ms. Freeland said she recognizes that Bill C-208 is in force. The Finance Minister said the government “absolutely supports” the core objective of the legislation, to create a level playing field for intergenerational transfers.

But she said there are concerns that loopholes may have been unintentionally created. “As finance minister, it’s my job to ensure everyone in Canada pays their fair share,” she added.

Earlier in the day, Liberal MP Rachel Bendayan, parliamentary secretary to the Minister of Small Business, said she “unequivocally” confirmed on behalf of the government that any amendments to C-208 will not be retroactive. Such amendments would come into effect no earlier than Nov. 1.

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Bill C-208 allows owners of small- and medium-sized businesses to claim proceeds from sales of shares to adult children or grandchildren 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.

The government and most of the Liberal caucus voted against the bill, but 19 Liberals, including Mr. Easter, did support it. Amendments proposed in the Senate would have delayed the implementation of the bill until Jan. 1, but that proposal was voted down and Bill C-208 was approved in its original form, with no implementation date specified.

In the Monday statement, the government said any amendments it brings forward to close loopholes will “honour the spirit” of the original bill.

One possible added measure would be tighter rules banning “surplus stripping,” a tax avoidance tactic in which an owner disburses cash from a business by claiming those payments as capital gains from an intergenerational transfer rather than as dividends. In surplus stripping, there is no real transfer of the business.

Possible remedies suggested by the government include requiring a transfer of “legal and factual” control from the parent to their child or grandchild; specifying the level of ownership that the parent can maintain “for a reasonable time” after the transfer; requirements for the parent to wind down their involvement in the business; and defining a minimum required level of involvement by the child or grandchild in the business after the transaction.

In its statement on Monday, the government said it will consult on draft legislative amendments, with the aim of passing legislation that will take effect on Nov. 1, or the date of publication of the final draft legislation, whichever is later.

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Dustin Mansfield, a tax partner at BDO Canada LLP, said the government has clearly stated it intends to preserve the spirit of the current legislation, and that genuine transfers of family businesses should be able to go ahead under the new and more favourable rules. But he noted that transactions aimed at simply avoiding taxes could expect to face audits. (Beyond the specific wording of any legislation, the Canada Revenue Agency is able to conduct audits of transactions it believes are solely motivated by tax avoidance.)

Patrick Gill, senior director of tax and financial policy for the Canadian Chamber of Commerce, said his organization welcomed the clear commitment by the government not to pass retroactive measures, and suggested the Liberals could also take the opportunity to address other small-business taxation issues.

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