The federal Liberal government was so concerned about relaxed rules for intergenerational transfers of small businesses triggering a flood of tax-evasion schemes that it attempted an end-run around parliamentary precedent last summer to delay that legislation coming into force.
The attempt to delay the implementation of Bill C-208, a private member’s bill, folded under blowback from opposition parties. After three weeks of controversy, the government backtracked, conceded that the new rules were in effect, and then promised amendments that would close down any loopholes. Six months later, however, it has yet to embark on consultation, much less pass legislation.
The government said in an e-mailed statement it still plans to draw up those draft amendments. It would then solicit comments on the proposed amendments as part of a consultation process.
The original legislation passed with the support of opposition parties and a handful of Liberal MPs. The government would need votes from other parties for any amendments, since the Liberals fell short of their bid in last year’s election campaign to convert their minority government into a majority.
The bill received royal assent on June 29. The next day, the government announced its intention to delay the legislation’s implementation until Jan 1., in apparent defiance of parliamentary convention and the wording of the federal Interpretation Act, which says laws come into effect upon royal assent unless otherwise specified.
The following month, the Commons finance committee scheduled a special session to probe the issue. The day before that session, the government backtracked and acknowledged the bill was already in effect. A statement from Finance Minister Chrystia Freeland pointed to an implementation date for amendments as early as Nov. 1.
But that date has come and gone, as has Jan. 1, with no draft legislation proposed. And there was no mention of the issue in December’s economic and fiscal update.
Larry Maguire, the Conservative MP who sponsored the private member’s bill, said in a statement that he has not heard anything from the government on potential amendments, and that the silence is creating uncertainty for farmers or small business owners who may want to transfer their enterprises to their children or grandchildren. Business owners have an “obvious concern” that any amendments the government passes could be applied retroactively, he wrote.
However, during the special sitting of the finance committee in July, 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 would not be retroactive.
Bill C-208 gives more generous tax treatment to intergenerational transfers of small and medium-sized businesses. It does this by treating those transactions in the same manner as sales to unrelated third parties. Business owners can 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.
Jennifer Leve, a tax partner at Dickinson Wright PLLC in Toronto, said her clients had been unhappy with the pre-C-208 tax treatment of sales to their offspring. “Everybody was always so worked up, but it wasn’t because they were trying to sell it just to get a tax benefit,” she said. “They really just wanted to sell it because they were retiring, or they were done with working. They were at that stage in their life.”
But critics of the bill, as well as the federal Finance Department, warned that it could enable business owners to evade taxes through a type of sham transfer aimed at extracting cash from a business – a practice called “surplus stripping.” Under that tactic, there is no real transfer of control, and hence no real transfer of the business.
In its July statement, the government said its amendments would include provisions to prevent surplus stripping. For example, it said it could introduce a requirement to transfer “legal and factual control” of a corporation to a child or grandchild. It also said it could specify the level of ownership that a parent could maintain for a “reasonable time” after such a transfer, the requirements and timeline for a transition, and the required level of involvement in a business by a child or grandchild following a transfer.
In a statement, the Canada Revenue Agency said it is too soon for it to have any data on taxpayer behaviours or trends related to the new rules, since the “tax years which might include arrangements contemplated by Bill C-208 have not yet concluded.”
Ms. Leve said she has seen some articles by tax professionals warning of possible retroactive changes to Bill C-208. But she said her preliminary discussions with clients interested in using the provisions of the new bill to transfer their businesses to children or grandchildren have not centred on worries about retroactivity or, on the other hand, rushing through transactions ahead of any amendments.
Instead, she said, her clients remain focused on whether they wish to retire and hand over their businesses to their offspring. “I think the bill is appropriate, because that’s the experience I’ve seen with clients wanting to do this kind of transaction.”
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