Bill C-691 (Historical)

An Act to amend the Income Tax Act (business transfer)

This enactment amends the Income Tax Act in order to exclude, under certain conditions, the transfer of qualified small business corporation shares by a taxpayer to the taxpayer's child or grandchild who is 18 years of age or older from the anti-avoidance rule of section 84.1.

Income Tax Act

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Madam Speaker, I am pleased to speak to Bill C-274, which has to do with the transfer of family businesses, a subject I have been interested in for quite some time.

The first document I consulted was the December 2010 report by Suzanne Landry for Raymond Chabot Grant Thornton, a chartered professional accountants firm. Ms. Landry, who is now a professor at the École des hautes études commerciales de Montréal, identified a number of possible solutions in her report.

This bill targets one of the most complex parts of the Income Tax Act: the sections about transfers and the capital gains deduction, among others. We are talking about butterfly transactions. This has all kinds of implications.

Subsection 84.1, which this bill would amend, was included in the Act under tax avoidance to prevent fraudulent transactions involving the transfer of businesses among family members. Caution is vital here.

I wanted to bring in legislation on this when I was a member of another Parliament, the Quebec National Assembly. The finance minister and I had several meetings on the matter. I decided not to go forward because he told me that it would cost a lot of money and that this was the type of measure that needed to be passed by the Parliament of Canada in Ottawa.

Fast forward to November 2013 when I arrived in Parliament. I was still working on ways to rectify this injustice. That is why I introduced Bill C-691, but unfortunately, the session ended in June 2015 and we did not have the chance to debate it.

Let us talk about the impetus for this bill. Let us look at the statistics. We were told that 45% of jobs and 80% of new jobs in the private sector were created by small businesses. The Canadian Federation of Independent Business, the CFIB, said that 66% of small businesses would change owners over the coming decade and that a third of small and medium-sized business owners wanted to sell to family members. That is to say nothing of the youth unemployment rate.

Then there are the reasons why this bill is essential. I can also say that business succession is at the heart of this bill. Business succession represents an economic challenge because it requires a succession plan and choosing the successor. We must encourage the sale of businesses to family members because selling a business to a stranger could result in its relocation, benefiting the strangers.

The safeguards in this bill will ensure that the ones to benefit will be the middle-class families. Ensuring the sustainability of small businesses is also essential to the job market.

This bill has an end goal. The concept of transferring a business to a family member is simple, but the solution is complex. When a parent sells his or her business to a person who is not related by blood, marriage, or adoption, the parent can choose to not pay tax on the first $824,000 of taxable capital gains. However, if the business is sold to the son, the parent cannot use the capital gains deduction. This bill will address an unfair element of the law.

When I introduced Bill C-691, measures also had to be taken to prevent abuse.

First, I included a gradual cap so that, if a company's taxable capital was less than $15 million, the company would be eligible for the deduction. If the company made between $10 million and $15 million in taxable capital, then the deduction would be reduced because we do not want large companies to benefit from this type of deduction.

Second, after placing this cap on taxable capital, I introduced a measure that required that an affidavit of the transaction, issued by an independent assessor and indicating the fair market value of the business, be presented to meet the conditions of the transaction. The buyer also had to be over the age of 18. What is more, if the buyer had to resell the shares after less than two years, the initial transaction would be deemed to have never occurred.

When I introduced the bill, it received the support of my NDP colleague and the the Canadian Federation of Independent Business, which was very important. When I held a press conference about the bill, representatives from the Canadian Association of Family Enterprise or CAFE were there with me to show their support. The Canadian Federation of Agriculture, which is made up of all the main farming associations in the country, and the Regroupement des cabinets de courtage d’assurance du Québec also supported the bill. It is important to mention that, in recent years, the Quebec CPA Order has raised this issue every time it has participated in pre-budget consultations.

In conclusion, I am certain this bill is the solution. I am glad that both the NDP and the Bloc Québécois decided to reintroduce it. However, there are a number of things to consider when we vote on this bill, cost being one of them.

I consulted the people at the Library of Parliament, and they told me that, in 2012, transactions involving eligible shares of small and medium-sized businesses amounted to more than $5 billion. In their tax returns, people cannot specify which transactions occurred at arm's length, so the Library of Parliament's findings are based on estimates.

They told me that, in 2012, transactions totalling $5 billion were carried out by more than 20,000 people. Supposing one-third of the transactions occurred between related individuals, such as 6,000 parents selling their businesses, giving them favourable tax treatment would cost the public purse no less than $300 million.

The Liberal government stated that it absolutely wants to help the middle class. Bourassa, the riding I represent, is struggling economically. Every month there, 19,000 children collect more than $8 million in Canada child benefit payments. By comparison, the cost of this program is exorbitant because it would cost $300 million to help 6,000 people.

In conclusion, yes, it is not fair, but present circumstances dictate that we take all of the factors into account to make the right decision. That is what we will do on Wednesday when we vote on Bill C-274.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

moved that Bill C-274, an Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), be read the second time and referred to a committee.

Mr. Speaker, I have to admit that I am very pleased to debate this bill. It is the first time that I have had the opportunity to introduce and debate a private member's bill in the House as I was unable to do so in the last Parliament.

Bill C-274 would correct and eliminate a gross injustice concerning the transfer of our farms and SMEs. This issue is more important than ever. Demographically speaking, 76% of small business owners plan to transfer ownership of their companies so that they can retire within the next 10 years, and 50% of farm owners want to do the same thing, also within the next 10 years.

The injustice that this bill is intended to remedy is that, if someone has a small business, a farm, or even a fishing boat and wants to sell it to his or her children, in a corporate structure, the seller, who is the owner of the small business or family farm in question, will pay much more income tax than if he or she decided to sell to a stranger.

In a very large number of cases, that means choosing between having a larger pension fund by selling to a stranger—since a pension fund is what business owners get when they sell their business—and having a smaller pension fund by selling to one’s children. The difference can be extremely large. If we ignore the tax planning that such a transaction can entail, for the sale of a farm worth $10 million, which, with all the assets, is quite often a reasonable price, selling to a child can cost up to $1.2 million more in income tax than if the farm is sold to a stranger. In the case of the sale of a business worth $1 million, the difference can be more than $300,000 in income tax.

The reason is very simple: if people want to sell to their children, to someone related to them, the difference between the sale price and the original price at the time of purchase is considered a dividend under the Income Tax Act. Consequently, it is treated like a dividend for tax purposes. Across the country, dividends are taxed at about 35% on average.

If business owners sell to someone who is not a family member, in other words, an unrelated person, a stranger, the difference between the sale price and the original price at the time of purchase is considered a capital gain. In that case, there is a lifetime exemption of about $825,000 for a business and about $1 million for a farm or a fishing boat. The remaining capital gain is taxed at about 25% on average. This explains the difference between selling to a stranger and selling to a child.

Obviously, it is unfair. In every constituency, we have business owners. People who want to sell their small business, their family farm, or their fishing boat in the Atlantic provinces, for example, are faced with an extremely heart-rending choice. Will they agree to sell their business to a family member and have $100,000, $125,000, or $150,000 less in their pension fund because they want their child to succeed them, because they want someone in the family to take over a business that they built with their own hands? They may not have the opportunity to do so if their pension fund is not large enough. Unfortunately, instead of selling to their child, who would be willing to take over, they have to consider selling to a stranger.

My bill seeks to correct this injustice. I admit that the bill is somewhat self-serving because this has been an ongoing problem in my constituency. In fact, the bill was prepared in co-operation with the farmers and SMEs in my riding. Rimouski-Neigette—Témiscouata—Les Basques is in the Lower St. Lawrence region, and 12% of the region’s economy is dependent on agriculture.

We have many family farms, especially dairy farms, as well as some maple sugar operations. In my constituency, it is not big companies that drive the economy. It is small businesses.

People, particularly those in the farming community, have been telling me about this situation since I first took office in 2011. They are being forced to choose between selling to a child at a tax loss and selling to a stranger.

The situation has become even more worrisome since there has been talk of land speculation. Certain people want to buy farmland to speculate on its value.

Such people have an advantage right from the start, since their offer means that the person selling the company or farm will have a lot less income tax to pay. The current situation is unfair.

My bill is designed to resolve the situation so that the sale of a family business or farm to a child will be treated as a capital gain, the same as if it were sold to a stranger.

There is no real reason to oppose such a measure. There are three reasons why such a measure may have been opposed in the past. First, this type of measure could open the door to aggressive tax avoidance, which is why things are the way they are now. However, my bill eliminates that possibility by requiring the buyer to retain his shares for a minimum of five years, except in case of death. People who retain their shares for five years do so because the family transfer was genuine and not because they were trying to work the system to avoid paying income tax.

The second reason why such a measure may have been opposed in the past is the argument that only the richest farmers or entrepreneurs would benefit from the measure. Once again, that is not the case with my bill because it deals only with transactions of $15 million or less. All transactions over $15 million, like those involving big farms or companies, are excluded from the terms of Bill C-274.

The third reason why such a measure could have been opposed, the last one I can think of, is the cost of the bill. Obviously, there will be a cost in lost revenue for the government. However, that cost is estimated not in the hundreds of millions of dollars, but between $75 million and $90 million. I know that different figures are being advanced, particularly by the finance department, but mine have been corroborated by many tax experts. The reason why we are talking about $75 million to $90 million is that, at present, all of this potential income tax paid by people who are selling small businesses or family farms is reduced through tax planning.

I can back up these figures with the following facts. Quebec, which has its own income taxation system, identified the same problem. It corrected it in its 2015 budget, and the correction has been implemented since March 2016. Its approach to fixing this problem is somewhat different than mine, but ultimately, Quebec estimates that eliminating this injustice will cost it some $15 million in lost revenue.

If Quebec loses $15 million, I think it is quite plausible that the lost revenue at the federal level would be around $75 million to $90 million.

This flagrant injustice has to be corrected. Speaking of injustice, imagine for a moment if the situation were reversed. Imagine if, currently, the rules for selling to a stranger and selling to one's child were the same, and then imagine if a member tabled a bill seeking to make selling to a stranger more appealing, would the House find that acceptable? Would it pass such a bill? Of course not; the question answers itself.

I would like to point out that I am not the only person in the House to note the problem. From what I understand, I should have the support of a great many, if not all, of the opposition members. I am eager to hear the speeches.

Let us not forget that, in June 2015, before the last election, the Liberal member for Bourassa tabled Bill C-691, which sought to correct this injustice regarding SMEs. My bill, at least so far as the SME component is concerned, was modelled on his bill as well as on that of my colleague from Berthier—Maskinongé, who drafted a number of clauses for farms and for fishing companies. My colleague from Joliette at the time also drafted a section on transactions between siblings.

My Liberal colleague at the time acknowledged the problem, and so did the government of Quebec, which then corrected it. I expect the hon. members to consider all of the small businesses and family farms in their ridings. I would also like members representing coastal constituencies to consider the impact this might have on fishing companies.

We are talking about small businesses and people who have worked all their lives to try and earn a living, people who, often, found themselves having to get their family business up and running again, as well as those who created it from scratch and now want it to stay in the family.

What this government has always been telling these Canadians is that they have to suffer this injustice when they sell their business to their children. In my opinion, that is totally unfair. Allow me to explain.

My colleague from Pierre-Boucher—Les Patriotes—Verchères had tried to table a bill in the wake of a situation that occurred in his riding and that made the headlines in May. Christian Tremblay, of Armoires Tremblay, in Saint-Mathieu-de-Beloeil, wanted to sell his company to his son Patrick, a company worth $1.7 million.

Imagine his surprise when he found out that, if he sold it to his son rather than to a stranger, he would have to pay $100,000 more in income tax. He considers the situation quite unfair. Will he sell to his son and make $100,000 less on a $1.7-million sale, or will he sell to a stranger so that he can keep that money in his account? The issue is receiving media attention, and thousands of new cases are bound to come up, at a growing rate, because of the demographic shift we will be going through over the next 10 years.

I would also like to talk about a problem that my bill will remedy, particularly in the regions. I would say that my bill may have greater importance in regions such as mine than it might have in major urban centres, because we are facing an exodus of young people.

In my constituency, young people are leaving the region for lack of employment opportunities; they go to school in urban centres, never to return again.

My bill will not fully remedy this situation. However, it will give our young people one more reason to stay in the region by giving them a better chance of acquiring the family business. It is something I hear about all the time in Rimouski-Neigette, Témiscouata and Les Basques, and I know that MPs from the regions have observed and heard the same thing.

I have covered a lot of kilometres in Canada promoting my bill. For two weeks last summer, I toured the Atlantic provinces talking to chambers of commerce, farming organizations and fishing organizations, to tell them about my bill, obviously, and find out if they would like to support it. In large part, they said yes.

I did the same thing in some parts of Quebec and Saskatchewan not long ago, and I will continue doing so until we vote on the bill at second reading. I think it is working, because I have enjoyed extraordinary support.

I organized a news conference when I introduced my bill last May. At my side was Dan Kelly, president of the Canadian Federation of Independent Business, who supports this bill.

I also have the support of the major chambers of commerce, including the Fédération des chambres de commerce du Québec, the metropolitan Montreal chamber of commerce, and different regional chambers in my riding and my region, as well as all over Quebec. Furthermore I have the support of the Canadian Federation of Agriculture, the Union des producteurs agricoles, the UPA, and other agricultural organizations all over the country. Finally, I have the support of fishers’ organizations, including the Nova Scotia Fish Packers Association, and I will have others as well. I will not abandon this fight.

I hope to have the support of the members of the House, who will see that this is not a partisan issue, but one that affects each of their ridings all over the country. In my view, it is a victory for common sense to vote in favour of this bill and so bring about tax fairness.

My bill rules out any possibility of fiscal abuse. It rules out the possibility that it will be disproportionately costly for the government, and it ensures that the richest owners or farmers are not going to be the ones to benefit.

Hence there is no reason to vote against this bill. I am eager to hear my colleagues on debate, and I hope to have their support so that this bill can be referred to the Standing Committee on Finance for second reading.

[Daniel Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you so much for the opportunity to be here. We are thrilled to be in front of the finance committee to share with you a few views from small and medium-sized firms about the budget and the budget implementation. Just as a reminder, CFIB has 109,000 members across Canada. All of them are small and medium-sized independently owned and operated businesses, none of them publicly traded corporations. Of course, we represent our members on a variety of public policy issues; finance is obviously quite high on that list.

The total tax burden is right at the top of our members' priorities. That is followed by government debt and deficit, and then government red tape and regulations. Progress has been made on some of these issues, but more progress is needed definitely on others.

I did want to start with the small-business corporate tax rate, because I represent a lot of very puzzled small-business owners right now. We were thrilled, in the election campaign, when all four national political parties, starting with the NDP, committed to reducing the small-business corporate tax rate from 11% to 9%. After the NDP first made the promise, the Tories then put it in the budget and legislated the commitment to the 9% rate. We were thrilled when now Prime Minister Trudeau endorsed that policy and committed to that policy dozens and dozens of times on the campaign trail. Elizabeth May, the leader of the Green Party, also committed to do the same. So you can imagine our surprise on budget day when we heard that, “Budget 2016 proposes that the small business tax rate remain at 10.5 per cent after 2016”. We're very pleased that the new government did move forward on the first quarter of that commitment to reduce it to 10.5%, but many small-business owners are deeply upset that the government has now chosen to abandon that promise with no prospect for reinstituting it whatsoever. In fact, as you see on slide 5, the very best advice that small-business owners give the government in terms of what would help them strengthen their own business performance at this rocky point in our economy is to reduce the current federal small-business corporate income tax rate. That was the number one suggestion from small-business owners in advance of the budget.

We've been trying to figure out why the government did this. Some reasons have been floated. I have to say, after meeting with several cabinet ministers, and many MPs of all parties, there has been no suggestion as to why the government chose to take this action. Some have suggested that small businesses are now categorized in the mind of the government as being in the category of the rich. I just wanted to draw your attention to slide 6 that shows that the average income of small-business owners resembles very much that of the general public. There are four times more small-business owners earning less than the low-income cut-off than there are those earning $250,000 or more, a definition of the rich.

Another theory that we explore on slide 7 is that the small-business deduction sometimes traps small businesses and they don't want to grow beyond that $500,000. When you look at the number of medium-sized firms in Canada, that might stand as a theory. But what slide 7 shows is that while there is a little bit of a crystallization—a small bump of businesses around the $500,000 threshold—the vast majority of businesses are way under that threshold, many of them earning under $50,000 a year in their business. We remain puzzled by this, and we would love if through the committee presentation we could explore why the government chose this action.

I will say a second issue that we're very serious about right now is the passive income rule. Right now we have members—campgrounds and self-storage facilities in your ridings across Canada—that are losing access to the small-business corporate tax rate because they have fewer than five employees. Through a weird interpretation, the government is now considering small firms with fewer than five employees in these sectors as being too small to access the small-business corporate tax rate. We did get the previous government to commit to reviewing this policy in the 2015 budget. The 2016 budget says that the review is over and the current rules stand, and now we have campgrounds and self-storage facilities that are being audited. Many of them suggested they will go out of business because they are being reassessed by the CRA. We need some help in terms of clarification on those issues.

The third issue I wanted to raise is the cancellation of the youth hiring credit. One of the things we loved about the government's platform was the idea that small businesses would have employer premiums on EI waived for 2016, 2017, and 2018, and that would help them hire youth between ages of 18 and 24. That was the promise.

That too appears to be scrapped and replaced with a committee to study youth employment. I'm not sure that we're going to get any new youth hired in Canada by creating yet another committee. I do want to remind the committee that small businesses will in fact see their employment insurance rates go up slightly in 2017 at about the worst possible time that one could imagine.

Finally, we are very worried that the finance minister has made a personal commitment to increase the Canada Pension Plan in the year ahead and said that 2016 will be the year that a deal is delivered.

I do want to say, though, that we really do encourage you to resurrect the Emmanuel Dubourg's private member's bill on business succession. That was a bill that he introduced in the last Parliament as a PMB. We love that idea. Bill C-691 would allow small-business owners to transfer their businesses to their children without incurring huge capital gains. In fact, many businesses say that it is more cost effective for them to sell their business to a stranger than it is for them to pass it on to their kids, and we provided some background in our document to explain why that's so powerful.

So I do urge you to reintroduce Emmanuel Dubourg's bill at the earliest possibility.

Thanks so much.

[Scott Ross]

It was Bill C-691.

[Scott Ross, Director of Business Risk Management and Farm Policy, Canadian Federation of Agriculture]

He is. I want to extend his regrets. He tried to get in from the Soo today and was caught up due to the weather.

I'd first like to introduce the Canadian Federation of Agriculture. We're an umbrella organization comprising provincial farm organizations and national commodity organizations representing over 200,000 farmers from coast to coast to coast. As an industry, Canadian agriculture is at the heart of an agriculture and agrifood sector that contributes over 6.7% to Canada's GDP, one in eight Canadian jobs, and well over $50 billion in wages and salaries across over 200,000 businesses.

I'd like to speak to four key areas today, which we've laid out in the brief which we provided you with in advance. These four areas are key to creating a policy environment conducive to continued success and growth in Canadian agriculture.

The first item I'd like to speak to is the issue of industry succession. With the average age of farmers now over 54 years and many looking to retire in the next decade, we're looking at approximately $70 billion in farm assets changing hands over the next 10 years. Estimates suggest that 75% of Canadian farmers look to retire over this period. This poses a significant potential for disruption to the industry.

At CFA over the past few years, what we have done is to work in collaboration with accounting firms across the country that have agricultural interests on developing a suite of low-cost and cost-neutral proposals that would focus on facilitating the intergenerational transfer of family farms while creating opportunities for new entrants to the industry. Family farms still represent 98% of all Canadian farms, and there are a number of positive aspects to this operating model that we would like to see continued in the agriculture industry.

Our requests can be broadly categorized under two main pillars, the first being broadening the definition of family “member” within the Income Tax Act, recognizing that farm families are comprised of a broad set of relations, more so than just parent and child.

The second point to note is the issue of “anti-avoidance” legislation, which we continue to see causing unintended consequences for agricultural operations due to structural changes in the industry. We have seen an increase in farming corporations—larger farms, due to consolidation and economies of scale, that now support multiple families—and because of this, we continue to see new barriers in place preventing flexible transfers from one generation to the next for family farms.

In particular, subsection 55(2) and section 84.1 of the Income Tax Act pose problems for joint sibling ownership as well as the use of holding companies when farm families look to transfer from one generation to the next. We were encouraged last year to see a private member's bill, Bill C-691, introduced by Emmanuel Dubourg, now the parliamentary secretary for the national treasury. It was looking at this issue of section 84.1 and addressing the use of holding companies for small and medium-sized enterprises. We encourage the reintroduction of that draft legislation.

These measures aren't meant to introduce new benefits or new provisions to the Income Tax Act, but rather to recognize that structural changes in the industry have left existing provisions with reduced utility for farm families looking to transfer from one generation to the next. Farm family children are no longer necessarily expected to stay on the farm. With multiple families supported by larger operations, we continue to see the broader subset of family relations looked at as the potential next best manager for the farm operation in the next generation.

The second issue I'd like to speak to are the chronic labour shortages that continue to plague the agriculture industry. The agriculture industry is full of high-quality job opportunities and career options with competitive wages and benefits. The industry also offers many lifestyle benefits and a flexibility not available in other industries. Agricultural employers expend extensive efforts to recruit and retain Canadian workers; however, the industry continues to identify pervasive and critical labour shortages as a major constraint and one of the biggest risks facing farm businesses.

To address this issue, we've identified three key requests, the first being increased funding for the collection of regional agricultural labour supply and demand information, both through the labour wage survey as well as the Canadian Agricultural Human Resource Council's ongoing work to develop labour market information forecast models for supply and demand.

The third point is that we would like to see a partnership between industry and government struck to implement CAHRC's agriculture and agrifood workforce action plan by creating a dedicated agriculture and agrifood international worker program and promoting channels to permanent residency for agriculture and agrifood workers.

Taxation

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Mr. Speaker, a parent who wants to sell the family business to his or her child is penalized by the Income Tax Act. Currently, if that person sold the business to a stranger, he could be entitled to a capital gains exemption of up to $813,600. However, if he sold the business to his child, there would be no exemption.

At at time when the population is aging and we want to create jobs and promote economic growth, will the Conservative government support my Bill C-691 to correct this injustice?

Income Tax Act

[Emmanuel Dubourg, Liberal, Bourassa, QC]

moved for leave to introduce Bill C-691, An Act to amend the Income Tax Act (business transfer).

Mr. Speaker, I am honoured to introduce this bill in the House of Commons. It amends the Income Tax Act in order to correct an injustice in the Canadian tax system that affects owners of family businesses.

In these times of economic contraction and high youth unemployment, I am proud of this initiative that will foster the continuity of family businesses, help them create good jobs and enable thousands of families to transfer the fruits of their labour to the next generation.

I thank my hon. colleague John McCallum for his always precious advice, and the vast number of organizations pledging official support, including the Canadian Federation of Independent Business and the Canadian Association of Family Enterprise, who will voice their support at my announcement later today.

I urge my colleagues to support this important bill.

(Motions deemed adopted, bill read the first time and printed)