Bill C-208 (Historical)

An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation)

This enactment amends the Income Tax Act in order to provide that, in the case of qualified small business corporation shares and shares of the capital stock of a family farm or fishing corporation, siblings are deemed not to be dealing at arm’s length and to be related, and that, under certain conditions, the transfer of those shares by a taxpayer to the taxpayer’s child or grandchild who is 18 years of age or older is to be excluded from the anti-avoidance rule of section 84.‍1.

Income Tax Act

[Yves Perron, Bloc, Berthier—Maskinongé, QC]

Madam Speaker, I am very pleased to speak to Bill C-208, which would significantly help businesses in Quebec and Canada with succession planning.

I once again want to congratulate my colleague from Brandon—Souris for introducing this bill. The Bloc Québécois considers succession planning to be essential to agriculture and all other sectors. We have supported this sector for a very long time. In fact, we started advocating for this idea back in 2005, after the Union des producteurs agricoles and the Fédération de la relève agricole du Québec issued a joint report that talked about the survival of our fishing businesses and farms.

We are talking about taxation, exemptions and various other topics, but what we are really talking about are small and medium-sized businesses, which are the backbone of our economy. We need to keep these businesses alive and make sure they survive. We need to make sure that these small businesses can keep going and that they are not put at a disadvantage where they will end up being bought out by big corporations. The survival of these small businesses is directly connected to the survival of our regions. This is why I am appealing to all of my colleagues.

I will never get used to it, but unfortunately, I once again sense that there is partisanship at play. It does not matter which party introduced the bill. What matters is that members look at the bill and ask themselves whether it is good for people. If it is good for people, then they should vote in favour of it. We need to correct this serious injustice. By protecting our small businesses, we are protecting our economic vitality. This is about sustainability, saving jobs and keeping knowledge in the community. As I just mentioned, it is about stopping the exodus of young people to urban centres. If they are able to take over the family business, then they will stay in the region.

Before I go on, I would like to give a nod to my colleague from Pierre-Boucher—Les Patriotes—Verchères, who introduced a similar bill in a previous Parliament. I commend him for that.

The Bloc Québécois defends the human-scale business model. I talk a lot about agriculture because I am very biased in favour of the farming community, but this is about all kinds of businesses. Human-scale businesses are the ones that keep regions vibrant and schools filled with children because there are families living in the community. We are not talking about a mega-farm that bought the land from eight of its neighbours, leaving only one family. Instead, there are eight families. That is the model we want to promote. In order to defend that model, we need to pass this bill. That is imperative. We have already been talking about it for too long.

Our SMEs are what keep us alive. It is a sector that has not received enough encouragement. I talk a lot about agriculture, but we want to protect innovative SMEs that could also sell their products abroad.

According to a 2018 estimate, between 30,000 and 60,000 Quebec businesses will not find new owners in the years to come. If they do not find new owners, they will die. If they die, 150,000 jobs and $8 billion to $10 billion in revenue will disappear.

In agriculture, it has long been said that every day, a farm disappears. That has not been the case this past year because there has been a slight increase in the number of businesses, which is great. We are happy about that, but it was no thanks to the government. It was because dynamic people started from scratch and created micro-farms. That is a good thing. We are happy about that, but we still see farms disappearing when they should be staying in business. We could do better. We can do better. Why are we not doing better?

I want us to take that step and move forward. Many of my colleagues have talked about numbers and statistics. I have lots of numbers too, but I am once again not sticking to my notes, which is just fine by me.

I want to talk about real people, real cases like the certified organic, 23,000-tap maple syrup operation owned by parents who are paying accountants a fortune to figure out how they can set up the transfer. Does another business have to buy the business? This is the parents' pension fund, and they want to pass it on to their children. They have to make a cruel choice. It makes no sense. That is the kind of example people keep sharing with me to this very day.

The dairy farm in Lac-Saint-Jean is another example. They keep postponing transferring the farm because they cannot come up with a solution, because there is no solution.

I would like to correct something my Liberal colleague said a moment ago. It is not true that the capital gains exemption can be used, otherwise we would not be voting on Bill C-208. I really hope my colleague will have a closer look at this file because in the cases brought to my attention, people are racking their brains for days, weeks and months, even paying a fortune to accountants.

On the other hand, the Liberal government likes to make people fill out complicated paperwork, to the point where they are forced to hire others to fill it out; that is how complicated it is. This seems to make the Liberals happy.

The Bloc Québécois does not think like that. We want to simplify people's lives and support the next generation, our youth and the people who want to live in our regions.

I want to share another example, and this is a true story.

A young person was nearing the end of negotiations to take over the family farm when he left on a trip. While he was away, his parents received an offer from someone outside the family that they could not refuse. The person offered ten times as much. The parents ended up selling the farm to the stranger. That type of situation destroys families and leaves permanent scars.

There are other examples of parents who hand over their business to their children out of a sense of obligation because they would lose sleep if they did not allow their son to take over the farm. As a result, they end up bitter and living in poverty. This also leaves scars. There are inn owners who resign themselves to paying a fortune in taxes. The father resigns himself to living on half of what he anticipated for his retirement. If that is not disgusting then what is?

Come on. We are the government. We have no right not to change this. Bill C-208 is very simple. It amends the Income Tax Act to give people who hand over their business to a relative the same privileges as someone who sells their business to a stranger. That is the right thing to do. Where is the problem? Where is the tax evasion?

Seriously, I sometimes find it difficult to remain calm when I hear the Liberals tell us that this could lead to tax evasion. We have been talking to them forever about tax havens and nothing has happened. Are they kidding me? Are they talking about tax evasion and SMEs? It does not happen often, but I am pretty much speechless. I could not even speak earlier. I told myself that it was not true, that my colleague did not say that, but he just did. We are talking about millions of dollars in tax havens. What about the web giants? How long have the Liberals been waffling to avoid taxing them? The idea is to ensure the survival of other smaller companies, such as our regional media, but they prefer it big and complicated. They favour their friends.

I am tired of a system that goes after and punishes the little guy. Small businesses are forced to fill out 28 forms, which stifles any economic momentum. Let us talk about the money. The Liberals have said that this will cost more than $1 billion, but that is not true. If I recall correctly, in 2017, the cost was estimated at $256 million. This really gets to me.

People thinking in terms of microeconomics see this issue only as a business that ceases to exist. Say the farm is sold to someone outside the family and is merged with a larger company. There is much more at stake here because the suppliers, the employees and the creditors are losing a business partner.

Family transfers are good because they allow for stability and familiarity. People know the business they have been dealing with for 25 or 35 years. When the son takes over the business, it is still the same business. He will keep it going.

Quebec changed its tax laws in 2016, yet another example of how Quebec is ahead. This week, the example was day care. This is good news, as long as we get the money.

I would like the House to come to that realization in this case too. Once again, the federal government is trying to catch up with Quebec laws. I am not saying that in a derogatory way. It is the truth.

Independent studies have shown that 47% of SME owners intend to exit their business within the next five years and 72% of them plan to exit within the next decade. In the fishing industry, a very high percentage of business owners are over the age of 50. Some might say that 50 is the prime of life. It is for me. However, that also means that the next generation needs to take over.

I am making a heartfelt plea and I want to send another message. To the government members who use doublespeak and make promises in private or during meetings by saying that this cause is important and that they are going to work on it, I want to say that now is the time to prove it. This is a good bill, and I am asking members to pass it.

Young people in Quebec and Canada are watching us. Business owners, those who support us and pay taxes are watching the government and waiting for results.

This is the first time that this bill has made it this far. Let us pass it.

[Kevin Lamoureux, Liberal, Parliamentary Secretary to the President of the Queen’s Privy Council for Canada and Minister of Intergovernmental Affairs and to the Leader of the Government in the House of Commons]

Madam Speaker, it is a pleasure to speak to my colleague's bill. I can appreciate that he has put in a great deal of effort to get it to this particular point.

There are some very serious concerns in regard to the bill and the impact it will have. I am not 100% convinced that this is the best direction to go. I find it interesting that the member says, for example, that this is all about the family farm and that the family farm needs this particular break. My understanding is that parents can already sell a family business directly to their child, while claiming the lifetime capital gains exemption on the resulting capital gain. I would be interested in hearing my colleague's comments in regard to that aspect.

The issue at hand, in the eyes of many, is not about passing on the family business; rather, it is about corporations. There are all sorts of other issues that come to mind when we talk about corporations.

I am not as familiar with the farming community as the member would be, given his background versus mine. However, what I can say is that I have had the opportunity to visit many farms over the years. Growing up, I can remember being out in Saskatchewan and doing some cultivating on the big John Deere four-wheel tractors on a family farm. There was a belief that the farmers running the farms had them handed down and that they intended to hand them down to their children.

Even though I have some personal, first-hand experience, I do not want to say that I have a complete understanding of all aspects of farming. However, I do support family farms, and I would like to see us enhance them and give them strength.

A lot of family farms are like small businesses, and I think the Government of Canada has very clearly shown its support for small businesses. We have seen that in a variety of ways. A lot of them have been highlighted during the pandemic. We often talk about some of the benefits the government has brought forward, and I suspect that rural communities and even farmers would have been afforded the opportunity to participate in some of the programs. This highlighted the need that is there. It is very real.

Bill C-208 proposes amendments that could easily be misused by corporations, which could look for tax planning opportunities. I do not believe that the member has addressed that issue head on and provided the types of changes necessary to provide assurances.

My New Democratic friends in particular talk a lot about tax avoidance. I would be very interested in hearing them provide their thoughts on that specific issue. Have they looked into that aspect of the legislation? Are we creating opportunities, by passing this legislation, that could provide for tax avoidance?

This is a legitimate question, and it is an area of concern that was not addressed to the degree it could have and should have been addressed at the committee stage. It is a legitimate concern. I would be very interested in hearing what the New Democrats have to say about it.

The former small business minister, who I got to know well because she was the House leader of the government, often talked about the importance of small businesses. I have said in the past that they are the backbone of the economy. We can further add to that to show how important our farmers are. They are the ones putting food on our tables and contributing to Canada's overall GDP and exports. They feed the world. The crops we are able to provide around the world are very impressive. The growth in the Province of Manitoba of the canola industry has been very impressive. It has gone from virtually nowhere years ago to a major crop recognized around the world. We often hear about the importance of prairie wheat and that it is feeding people around the world. We can take a sense of pride in that and look at ways to support it.

In the budget, we heard about a number of initiatives. One that comes to mind right offhand is in the area of drying grains. The budget attempts to deal with that particular issue by supporting farmers.

We could talk about how we supported small businesses through the development of programs during the pandemic, such as the Canada emergency wage subsidy program, which has been very helpful to small businesses in general. We came up with the Canada emergency business account too. Another one I often reference for small businesses in particular is the Canada emergency rent subsidy program. These things are very real and tangible.

We know that many businesses continue to face stress and uncertainty as a direct result of COVID-19. That is why in many ways the government has stepped up to the plate to make sure there is support during these unprecedented times. I referenced the Canada emergency business account, which helped somewhere in the neighbourhood of three-quarters of a million small businesses. We are talking about tens of billions of dollars in loans. The Canada emergency wage subsidy program affected several million people, and, again, tens of billions of dollars were spent on it. There is the additional lockdown support. There was support for the agriculture and agri-food sector. The government recognized it as an essential service and provided support to it. We are committed to supporting producers and businesses so they can continue to provide for Canadians.

We have taken unprecedented action to support farmers, ranchers, food businesses and food processors across the value chain, and have provided support for vulnerable populations. For example, we quickly unlocked the $5 billion in additional Farm Credit Canada lending capacity and launched $100 million for a new agriculture and food business solutions fund to ensure that businesses in the sector have the support they need. We also increased the Canadian Dairy Commission's borrowing capacity by a couple of hundred million dollars. That was to allow us to support costs associated with the temporary storage of things like cheese and butter to avoid food waste.

A number of programs were put into place to support our producers. Programs provided dollars to foreign workers—

[Larry Maguire, Conservative, Brandon—Souris, MB]

moved that the bill be read the third time and passed.

Mr. Speaker, I want to thank my colleagues for bringing this to third reading because it is a privilege to speak in the House to Bill C-208, an act to amend the Income Tax Act, transfer of small business or family farm or a fishing corporation.

I want to begin my remarks by thanking a few of my colleagues who helped get my private member's bill to third reading much quicker than originally planned. Particularly, I want to thank my good friend, the hon. member for Saskatoon—Grasswood, who traded his private member's bill spot during the second reading, which allowed a vote to occur a few weeks earlier than scheduled. I also want to thank my colleague from Regina—Qu'Appelle, who traded his private member's bill spot. That is the reason we are debating Bill C-208 this evening.

The reason I am highlighting and thanking these two specific members is that time is of the essence. No one knows what the future holds or when an election is going to occur. These matters are outside of my control, so I want to focus on getting this legislation passed to support all small businesses. We must correct this massive injustice within the Income Tax Act that unfairly punishes individuals when they sell their qualifying small business, farm or fishing operation to their own family.

For those members who have not been closely following the debate, I will give a brief overview. As it stands, when a qualifying small business, farm or fishing operation is sold to a member of the owner's own family, the Income Tax Act treats the sale differently than if it were sold to an absolute stranger.

Yes, members heard that right. There are currently two sets of rules, and in some cases, it can result in the difference of hundreds of thousands of dollars. For some, that might not sound like a lot, but in many cases it could result in a parent making the tough decision to sell their business to a complete stranger rather than to their own children. That is wrong, and I intend on fixing it once and for all.

During my first hour of debate, I gave two examples of why Bill C-208 is needed.

The first involved a family wanting to sell their bakery to their daughter. If they sold the bakery to a stranger rather than their daughter, they would have an effective tax rate of 10%, after using their lifetime capital gains exemption. However, if they sold their bakery to their daughter, she would be obligated to repay their loan with personal tax dollars, which is a significant tax penalty.

The second example was a father wanting to sell his farm to his son to fund his retirement. If the father were to sell his farm to a stranger, he could use his capital gains exemption on the sale, resulting in an effective tax rate of 13.39%. However, if the farmer sold his farm to his son, that sale would be recorded as a dividend rather than a capital gain, and the farmer would pay 47.4% in tax. That is a huge difference, and I think we can all agree that it is completely unfair.

Since I introduced this legislation, I have been contacted by numerous agricultural and business organizations. People across the country have contacted my office to let me know how important this legislation is to their family. Every single constituency in Canada would be positively impacted by this legislation, and it would result in more locally owned and operated businesses, the type of businesses whose owners are deeply involved in their communities and provide steady employment for countless individuals, and it would help keep farms and fishing operations in the family.

Bill C-208 sends a strong message of hope to young farmers who want to carry on what their family started and to other young family entrepreneurs included with them. Most of all, it would bring tax fairness to the Income Tax Act. No longer would parents have to be given a false choice of having to choose between a larger retirement package by selling to a stranger, which has no charge, or a massive tax bill because they sold to a family member.

Other than Finance Canada officials, I received zero push-back from any of the expert witnesses who appeared in front of the finance committee. Witness after witness came to support the bill and to answer the questions put to them. All my colleagues who sit on the finance committee did their due diligence and asked insightful questions. I want to thank the chair of the finance committee, who helped shepherd this legislation, for scheduling ample time for witnesses.

I am pleased to report that the concerns put forward by the Liberal MPs were fully answered. While I do not know how they will vote at third reading, I would kindly ask for their support. Now that we have had hours of debate and a thorough committee study, there is sufficient evidence to justify the changes I am proposing.

The Income Tax Act is complex. It has been changed and amended over the years, and in many circumstances one needs a lawyer or accountant to decipher its intent. With that in mind, the finance committee prudently invited multiple tax experts. In many cases, they gave real-world examples, so members were able to better grasp the implications of the bill. Due to the member for Kingston and the Islands laying out Finance Canada's concerns during second reading, we knew exactly what questions the Liberal MPs were going to ask. Because the government outlined its argument during second reading, the tax experts and I had time to prepare in order to put its fears to rest.

We know what the bill will cost, due to the Parliamentary Budget Officer's analysis, as I have said in previous speeches. We know there are safeguards built into the legislation to ensure people do not skirt tax rules. We know the legislation is squarely focused on small and medium-sized qualifying businesses. We know the legislation, as drafted, will achieve its intended aim, which is to level the playing field in such transactions.

For those members who want further reasons to support the bill, I will highlight some specific comments and evidence provided to the finance committee.

Brian Janzen, who is a senior tax manager at Deloitte, appeared at the finance committee. As someone who has been handling business transfers for close to 30 years, he understands the Income Tax Act and the implications of section 84.1, which he said has been a thorn in the industry's side for many years.

In his opening remarks, he provided an example of what would happen with or without the current wording of section 84.1 regarding the sale of a business. He gave the example of a restaurant that is worth a million dollars. If the owner sells the restaurant to a stranger, he, according to Mr. Janzen, “will walk away with after-tax proceeds...of around $971,000.” He would pay roughly $29,000 in taxes, but if the restaurant were to sell to a family member, the taxes paid would be roughly “$466,000 because of the deemed dividend. That's a difference, between the two scenarios, of $437,000.”

I think Mr. Janzen summed it up quite nicely when he said, “That's just crazy.” I agree with him. It is crazy. This sort of scenario is playing out every single day, and it needs to stop.

Mr. Janzen also said in his opening remarks, “This bill is helping the lower end of the small business community; it is not helping the huge, rich companies even if they're family owned.”

Cindy David, who is the chair of the board for the Conference for Advanced Life Underwriting in Canada appeared at the finance committee and spoke about the necessity of getting this bill passed. She said:

...there's some urgency around the need for the government to act in amending 84.1.... [as] small businesses employ 70% of the private sector and have been major contributors to employment growth over the past decade. A vast majority of those businesses have fewer than 20 employees.

The last comment I want to highlight was made by Dustin Mansfield, who is a chartered professional accountant at BDO Canada. Mr. Mansfield knows first hand the challenges the current wording of section 84.1 causes for families and how it unfairly taxes them at a different rate.

Of Bill C-208, he said, “the legislation would put a successor child of a business in the same shoes as an unrelated party upon the transaction of the business. Why does a stranger receive better tax treatment than a child, when the purpose is to keep businesses within the family?” I do not think Dustin posed this as a rhetorical question.

The fact remains that there are some who do not want this legislation to pass. However, we were elected to lead, to improve the quality of life of those we represent and to make sure that we pass down a stronger nation than the one we inherited. We cannot take our prosperity for granted.

I urge my colleagues to carefully review the testimony provided at the finance committee; call their chambers of commerce, or local farmers and fishers; go make a few phone calls to local accountants or other tax experts; and speak to those who have been impacted to ask them if they think it is fair that they had to pay more taxes for the business to stay in the family. Members will find almost universal support for this bill. They will also find there is bipartisan support. We need to pass this bill and send it to the Senate.

Private Members' Business gives all of us an opportunity to set aside our political allegiances, and I would kindly ask my Liberal colleagues to allow this legislation to go to a vote. If the debate carries on, it will be even further pushed back. Once again, I thank all my colleagues who supported Bill C-208 and helped to get it this far. Out of all the attempts made to fix this unfair tax treatment, we have made it the furthest in Parliament.

By working together, we can support our entrepreneurs, small businesses, farmers and fishers who make up the backbone of our economy, so let us roll up our sleeves and get this job done.

The House proceeded to the consideration of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), as reported (without amendment) from the committee.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you.

I want to bring up another issue related to small businesses, and particularly family businesses. You have taken a position on Bill C-208, by stating in particular that the current rules in the Income Tax Act discourage the sale of a business to a family member. The House is expected to begin consideration of the bill at third reading on May 10.

Why is the passage of this bill important to the Canadian Federation of Independent Business?

Finance

[Wayne Easter, Liberal, Malpeque, PE]

Mr. Speaker, I have the honour to present, in both official languages, the third report of the Standing Committee on Finance in relation to Bill C-208, an act to amend the Income Tax Act, transfer of small business or family farm or fishing corporation. The committee has studied the bill and has decided to report the bill back to the House without amendment.

[The Chair, Liberal, Wayne Easter]

Thank you very much. That concludes our discussion on Bill C-208, and we're within our time frame so we're not disrupting another committee.

Thank you, everyone.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

The bill before us is very important. Since being elected, I have met quite a few owners of family businesses, farming and non-farming, who were having a horrible time of things. It's a serious matter and they were in deep trouble. We've heard from a group of witnesses, and they all told us that we needed to forge ahead and that the situation made no sense. I know that it's a complex matter from the legislative and other standpoints. We certainly need to take the points that you've made into consideration. I wouldn't want to just hear that it's all very complicated and then find that nothing is being done. It's an urgent problem and the bill should be adopted.

From my point of view, as it's written, Bill C-208 would deal with the situation. After that we could examine the Hansard transcriptions, the debates in the House and the committee evidence to understand the intent of the bill. It's been said many times that we wouldn't want this bill to provide an opportunity for people who are cheating to avoid paying taxes. Its purpose is to facilitate intergenerational business transfers. Government regulations could spell out the details, and if there are problems, we could deal with those afterwards. But it's really essential to forge ahead.

The Quebec finance minister, Mr. Eric Girard, came to the Grand Joliette chamber of commerce before the pandemic, and said he couldn't understand why it hadn't been dealt with in Ottawa yet, when it had in Quebec.

Gentlemen, you've been working on that and you've been able to look at the model used in Quebec, which has guidelines.

What's the problem with what Quebec is doing? Why are you so afraid that we're going to go ahead and adopt a similar bill?

[Trevor McGowan]

Thank you.

I'd like to build upon what my colleague Shawn has already said about the context of the anti-surplus-stripping rules in section 84.1 and the intended purpose of the proposed amendment in Bill C-208, and then discuss how it would apply, looking at the specific legislative proposal.

I'll skip ahead to clause 2. I will mention clause 1 a little bit later, but clause 2 is the one that really deals with intergenerational transfers. It applies where a parent transfers shares of a corporation to a corporation controlled by their child or grandchild. There's a fairly simple trigger for that relief to be provided when it applies. That is the deeming of the purchaser corporation to not be dealing at arm's-length, which effectively turns off the anti-avoidance rule in section 84.1.

The difficulty or some of the challenge with the measure in the bill is how precisely targeted it is to get at what you'd think of as a real intergenerational transfer of a business. Of course, it deals, as I said, with the transfer of shares of a corporation owned by a parent to a corporation controlled by the child. It does not intrinsically deal with the real transfer of the business that is being carried on.

That level of abstraction from the actual business—where a parent wants to hand it over to their child or to their grandchild, so they can carry it on, keep it going, continue building it and continue running the business—is not directly provided in the bill due to this abstraction, just looking at transfers of shares going from one to another. It's that lack of precise targeting that I think we want to highlight as being a concern with the measure.

I could provide a few more details on that. In particular, the rule doesn't require the child, after the transfer, to be involved in the business in any way. It doesn't require the parent to cease to be involved in the business after the transfer of the shares. In fact, the parent could simply wind up the business right after the transfer.

There is a requirement that the purchaser corporation that gets the transfer shares be legally controlled by the child at the time of transfer. “Legally controlled” is generally defined for tax purposes to mean that the child could elect a majority of the board of directors. However, it does not prevent the purchaser corporation from being factually controlled by the parent. Likewise, it doesn't provide that the child will necessarily have any economic exposure to the shares being transferred. In fact, it does not require the child to retain ownership of the purchaser corporation after the transfer.

The requirement that shares be transferred to a purchaser corporation controlled, at the time of transfer, by the parent, is somewhat abstract, but I think it's worth noting the points of departure between that and what you'd normally consider to be a real transfer of a business to a child.

Why do these matter? They matter because while it is generally described as facilitating an intergenerational transfer in certain cases that Shawn set out—basically a transfer of shares to a corporation owned or controlled by the child—it would also open the door to facilitate tax planning, generally for high-net-worth individuals.

Shawn was mentioning the tax rate differential between capital gains and dividends in this anti-surplus-stripping rule. That's at the heart of it. In particular, as Shawn said, for a top-marginal-rate individual in Ontario, that might be the difference between around a 47% tax rate on dividends going down to a tax rate of 26% or so on capital gains.

Likewise, if the parent is able to access the lifetime capital gains exemption, as they would with some fairly simple planning, it could drive their tax rate down to zero. They would effectively be able to extract retained earnings from the corporation they control and continue controlling the corporation, continue running the business. The child need not necessarily have any involvement in the business after the transfer. To the extent their lifetime capital gains exemption is available, their tax would go from, again, for a top-rate Ontario resident—just to use as an example—47% down to nil.

Even in circumstances where a lifetime capital gains exemption is not available, say either because it's already been used up or because the corporation that carries on the business has more than $15 million in taxable capital—as I understand, a component of the rules would provide a grind to prevent a lifetime capital gains exemption from being accessed for larger companies—you would still have a rate delta, as Shawn said, of around 20 percentage points.

That is obviously going to be the most valuable for high-net-worth individuals who are subject to the top marginal tax rates and for individuals who want to extract a sizable amount of money from their corporation, such that the tax savings would be enough to more than offset the transaction fees of putting these kinds of complex arrangements into place.

I'd be happy to walk the committee through exactly how these transactions can be structured. The gist of it is that the parent has shares of a corporation, transfers them to a child or a company owned by the child in exchange for a promissory note. The parent's company pays the child's company an intercorporate dividend, which of course is tax free, and that dividend is then used to repay the promissory note that was used to purchase the shares. In that way, the money gets out of the corporation; you have a capital gain if the anti-avoidance rules of section 84.1 don't apply; and the individual is able to, instead of paying dividend rates, pay the much lower capital gains rates or nil if the lifetime capital gains exemption is applied.

That, hopefully, gives a bit of a flavour about the slight disconnect in the rules. When we look at the legal form of a transfer of shares by a parent to a company owned by their child, there's that bit of a factual disconnect between that and the real bricks-and-mortar transfer of an actual business to their child that the child continues to carry on.

I had mentioned earlier that I wanted to touch on clause 1, as it is different from clause 2. Clause 2 relates to intergenerational transfers and provides an exception for the anti-surplus-stripping rule in section 84.1. Clause 1 doesn't really relate to intergenerational transfers of a business. Rather, it relates to a different anti-avoidance rule, but it relates to siblings.

Just like for an individual moving from a dividend rate down to a capital gains rate means a tax savings, for corporations, transfers between corporations, if they can essentially transmogrify or change a capital gain into a dividend, intercorporate dividends are generally not subject to tax and so they're able to avoid tax in that way. That's what's called capital gains stripping generally. Section 55 is an anti-avoidance rule intended to prevent that.

There are a couple of important exceptions. One of them is that if you have a corporate reorganization between related parties, then you can move amounts around among your corporations. As long as it's all in the same group, there won't be any negative tax consequences.

This measure would allow siblings to escape the application of the anti-avoidance rule in section 55. As a result, one sibling would essentially be allowed to transfer their stake in the business to the other sibling without triggering this anti-avoidance rule that could result in capital gains treatment. It would provide a tax deferral on that sort of transfer between siblings. Again, it's not intergenerational and is dramatically different, which is why I did it in that order. I hope that provides a bit more of a flavour of what clause 1 does.

That, I think, provides a bit of an overview of the bill and some of the observations that we at the department have made about its technical operation. Shawn and I would be happy to answer any questions you might have.

[Shawn Porter]

I have just a handful of observations. I know the committee has heard from a number of witnesses and is pretty familiar with the content, the purpose and the policy underlying Bill C-208, but to level-set, it's obviously intended to facilitate intergenerational transfers of a business that are otherwise caught by a surplus-stripping rule under the existing tax system.

What is surplus stripping? That is an important context-setting question.

Surplus stripping occurs when an individual shareholder reaches into a corporation to access its surplus in a manner that produces a capital gain at the personal level rather than a dividend. The normative expectation is that a corporation would earn income that forms part of surplus and be distributed to the individual shareholder as a dividend. When steps are taken to achieve that kind of result not in the context of a sale of those shares to an arm's-length person, then this section 84.1 rule, which you're all becoming quite familiar with, steps in to characterize that capital gain as a dividend.

That's the starting contextual point, the foundational principle.

Building on that just a little, the rule applies to corporate surplus that is accessed by a parent through a corporation owned by a child. The reason that's the result is that the parent and the child are related for purposes of the tax rules and, for purposes of this surplus-stripping rule, are essentially treated as the same economic unit. There has been no disposition of shares to an arm's-length person in that context. Corporate surplus has merely been accessed by the individual shareholders. The tax system doesn't care who they are if they're related or not dealing at arm's-length.

That's important context as well, the parent and the child, because this is the point we're taken to where surplus stripping bumps up against an intergenerational transfer, which is the point underlying Bill C-208. We know and accept that, in some cases, it could be more attractive to sell the shares of a business corporation to an arm's-length person than to a child, in the expectation that the sale of those shares to an arm's-length person would produce a capital gain whereas there are circumstances in which the sale to a child would produce a dividend.

Trevor will get into the differentials in a little more detail, but again, the context is that those dividends are likely going to be taxed in the mid to high 40% range, and a capital gain in the mid to high 20% range. There is delta of around 20 percentage points as it relates to realizing corporate surplus in the form of a capital gain in the hands of an individual rather than a dividend. That's a fairly significant benefit, and needless to say, one that is sought after in the context of ordinary-course tax planning.

The key point we want to bring to the committee's attention as it relates to your deliberations around Bill C-208 is that, if there is a decision to except from the surplus-stripping rule a genuine intergenerational transfer, say, on neutrality grounds—neutrality in terms of producing the same result as the sale to an arm's-length person—I'm not going to comment on that policy point at the moment, but if that decision were taken, one needs to be mindful of the boundaries that are established between what constitutes surplus stripping and what constitutes a real intergenerational transfer of a business.

In other words, we wouldn't want to make an amendment to the act that would open the system up to vulnerability in the form of a parent being able to access corporate surplus through a corporation owned by a child if that was not in the context of a real or genuine intergenerational transfer of a business. In the hallmarks for assessing whether there has been a real, genuine intergenerational transfer of a business, one would look to the terms and conditions that would be reached between arm's-length parties in the context of the sale of a business and to what extent those terms and conditions exist as between any transaction that might be undertaken between a parent and a corporation owned by a child.

The legislative challenge is in how to delineate in legislative language those boundaries so that the real intergenerational transfer situation could be protected, but at the same time, the system isn't opened up such that it becomes vulnerable to relatively more aggressive or abusive forms of tax planning.

The final point that I would make, before I turn it over to Trevor, is just to remind the committee that this issue only arises when the shares of a small business corporation or a business corporation generally are sold by a parent to a corporation owned by a child. There are no impediments under the tax system to an intergenerational transfer of a business carried on in unincorporated form, whether a sole proprietorship or a partnership. Indeed, there are no impediments under the tax rules to the sale of shares of a business corporation to a child in circumstances where the child does not seek to use the corporate surplus of the acquired company to finance the acquisition itself. That's where the rub occurs.

It's the accessing of the corporate surplus to finance the acquisition by the child that arises at this awkward intersection point between surplus stripping and a transaction that looks like a genuine intergenerational transfer of a business.

With that, I know we'll have ample opportunity for questions.

I would turn it over to you now, Trevor, for a slightly more detailed walk-through with some illustrations and some examples to help highlight that critical point around establishing the boundary.

[Shawn Porter]

Our plan was that I would spend a few minutes providing a little bit in the way of opening remarks and context-setting around Bill C-208, and then I would turn it over to Trevor to provide a little more detail, in the form of examples, to help illustrate the key points we'd like to make today.

Does that work for the committee?

[The Chair, Liberal, Wayne Easter]

We will now go to Bill C-208, Mr. Maguire's bill, an act to amend the Income Tax Act regarding the transfer of a small business or family farm or fishing corporation.

We have, from—

[The Chair, Liberal, Wayne Easter]

We will have to end it there and go to Bill C-208, based on the previous agreement.

I want to sincerely thank officials. They took a lot of their time this afternoon for probably only 40 minutes of questions.

I think Mr. Ste-Marie said it right: We thank you from the bottom of our hearts for your efforts.

When we look back a year ago, when the calls were set up at night, there were always officials on those calls. For the government to roll out a program, it meant we were going to have to fix it as we went, and you were the folks trying to fix it and make the changes. Members of all parties had the opportunity to question you folks well into the night on those calls. I want to sincerely thank you for what you have done for the country over the last year, and thank you for your efforts going forward.

With that, we will release all the witnesses except Mr. McGowan, and I believe Mr. Porter is here now as well.

Thank you very much.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

No. I'm happy to go to the next speaker so that we can get to Bill C-208, but that's an important consideration for officials who advise our policy-makers.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Okay.

Mr. Chair, I will stop now so that we can move on to the study of Bill C-208 a little more quickly.

Thanks to everyone.