A private member's bill aimed at facilitating intergenerational transfers of small businesses and farms has moved one step closer to becoming law. After passing third reading in the House of Commons on May 12, 2021, with 199 MPs voting in favour and 128 against, Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), must now be voted on by the Senate.
The Bill's primary focus is limiting the potentially harsh application of section 84.1 of the Income Tax Act in cases of intergenerational transfers of businesses and farms. Section 84.1 is an anti-avoidance rule that generally prevents an individual from avoiding tax that would otherwise arise on a taxable dividend by transferring shares to a non-arm's length purchaser corporation.
The current drafting of section 84.1 significantly impedes tax-efficient intergenerational transfers of small businesses and farms. If an owner-manager were to sell small business shares to an arm's length party, the sale is treated as a capital gain. The owner-manager benefits from the lower rate applicable to capital gains and is also eligible to claim the lifetime capital gains exemption. In contrast, if the owner were to sell shares to a corporation owned by a child or grandchild, section 84.1 can operate to tax the owner as if he or she received a dividend. A dividend is taxed at a higher rate and cannot be sheltered by the lifetime capital gains exemption.
Intergenerational transfers are thus penalized relative to arm's length sales. This result puts an owner-manager in the difficult situation of having to bear additional tax, and therefore reduced retirement funds, if he or she wants to keep the business in the family.
The Bill proposes to provide a carve out from section 84.1 for sales of "qualified small business corporation shares" and "shares of the capital stock of a family farm or fishing corporation," both defined terms in the Act ("Qualifying Shares"). The carve-out would apply where three conditions are satisfied:
- the transferred shares are Qualifying Shares;
- the shares are transferred to a purchaser corporation that is controlled by one or more of the owner-manager's children or grandchildren who are 18 years of age or older; and
- the purchaser corporation does not dispose of the transferred shares within 60 months of acquiring them.
The Bill also proposes a small but very beneficial amendment to section 55, another anti-avoidance rule in the Act, to facilitate tax-deferred reorganizations of family-owned businesses and farms which involve sibling ownership.
It remains to be seen whether Bill C-208, introduced by Manitoba Conservative MP Larry Maguire, will advance through the Senate or will stale in the face of summer recesses or a premature Federal election. While it is very unusual for a private member's bill addressing tax matters to pass through the House, the Bill has received non-partisan support and follows prior attempts by both the NDP (Bill C-661, 2015; Bill C-274, 2016) and the Liberal party (Bill C-691, 2015).
If enacted, Bill C-208 would allow owners of small businesses, farms and fishing corporations to pay the same tax when selling to a family member as they would if they sold to an arm's length buyer, a result that is long overdue. Contact any member of the Bennett Jones Tax group if you wish to discuss how the enactment of Bill C-208 may benefit your small business or farm succession plan, or exit strategy.