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.

[Trevor McGowan]

The government has announced that it would not apply before November 1, 2021. As a general rule, income tax amendments often apply as of the date of their announcement.

For example, Bill C-30 received royal assent on the same day as Bill C-208. It was the first budget bill for 2021. That had a number of measures that had application dates based on March 18, 2019, the day of the 2019 federal budget related to, for example, the foreign affiliate dumping rules, some mutual fund trust measures using an allocation redeeming methodology, and individual pension plans. Several amendments had their application dates based upon—

[Trevor McGowan]

As we've discussed, these amendments to the Income Tax Act that were made by Bill C-208 are part of Canadian law and could only be changed through a subsequent bill tabled in Parliament that receives royal assent.

[Trevor McGowan]

Yes. That was the government's announcement, that whatever conditions would be introduced in a later bill, which again would have to go through Parliament, those restrictions or conditions would not apply before November 1. From now until October 31, at a minimum, the law as enacted by Bill C-208 would apply.

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

Thank you, Mr. Chair.

Just for clarity, Mr. McGowan, I want to go back to a question that one of my Liberal colleagues asked you earlier in this area. You said that the current plan and the message to the small business owners is that Bill C-208 will be in effect, unaltered, until November 1. Can you confirm that any small business transfers to family members that take place between today, or even June 30, and November 1 will not be subject to retroactive application of any further amendments?

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

Thank you, Mr. Chair.

I want to start with a few comments.

In yesterday's news release, the government recognized that Bill C‑208 has been law since it received royal assent. As I said this morning, I have no doubt that yesterday's news release had to do with the fact that the committee was recalled for a special meeting today. Again, hats off to us.

My concerns stem from the questions I asked Mr. McGowan last time. In yesterday's news release, the government stated that Bill C‑208 had become law and that the law was the law, but the government also indicated that it would bring forward new legislation to amend the bill. Since the bill was studied for 527 days, I'm wondering why the government did not propose the amendments during the usual examination process. Five hundred and twenty-seven days is a long time.

What's more, as has been mentioned, this isn't the first time Parliament has considered a bill like this. A few years ago, Liberal member Emmanuel Dubourg proposed similar legislation, as did the NDP's Guy Caron, not to mention my fellow Bloc Québécois member Xavier Barsalou‑Duval. Mr. Maguire's version was the one that finally took and got passed by Parliament.

Although the bill received royal assent, the government did not recognize it as law, just as the government did not recognize the authority of the House of Commons. Threats were made, and the Standing Committee on Finance decided to hold an emergency meeting. That was when the government finally acknowledged the application date of the bill, while indicating that it would bring forward amendments. Why were those amendments not brought forward during the legislative process, which lasted 527 days?

I asked the witnesses who were called before the committee whether the government had instructed them to draft amendments. I recall quite clearly that Mr. McGowan, among others, told the committee members that it was rather complicated, that numerous loopholes existed and that they needed to be closed. I then asked whether the Department of Finance had prepared, at the government's behest, amendments that could have been brought forward, voted on and adopted during that 527‑day period.

Now, Mr. McGowan, Mr. Jovanovic and Ms. Aitken are saying that it is a matter of cabinet confidence and that they can't answer the question. My guess is that, if the amendments aren't ready yet, they will be soon, since the government announced that a bill containing the amendments was on the way.

The government could be accused of being asleep at the wheel, because it dragged its feet and did not do what it should have—instruct the department to draft the amendments and bring them forward. On the committee and in the House, we were all able to work together harmoniously. I have no doubt that, had we studied the amendments, the level of co‑operation would have been high and the process would have been fruitful, but that was not the case. That makes me wonder what happened. Here's my theory.

I think that, back in the spring, the government was considering calling an election, not caring too much about Bill C‑208—figuring it would die on the Order Paper. An election was coming, anyhow. When the third wave of the pandemic hit, the Liberals realized that they couldn't do as they had planned; they would lose face if they called an election in the spring. Subsequently, the bill received royal assent, which was seen as collateral damage in the government's little game of cards. The Liberals weren't expecting it.

Now that the bill has received royal assent, they are saying 527 days was not enough time. They want to recognize the changes, but announced that they were going to bring forward new legislation to do what they should have done when the time was right. The level of ineptitude is astounding, and I have a real problem with that.

Those are my comments. I have no questions.

[Peter Fragiskatos, Liberal, London North Centre, ON]

As part of that summary, perhaps you would have seen that Mr. Dufresne made clear when I asked him—I think this question was put to him by others as well—that yesterday's press release clarifies the matter. If clarity was needed, yesterday's press release makes things absolutely crystal clear. That is to say that by recognizing Bill C-208 in the way that the government did yesterday, the matter is a matter of law that came into being through royal assent. While my friends in the opposition can point to one press release, interestingly enough they're pointing to one press release but not yesterday's. They're pointing to one released a few weeks ago.

We've provided clarity here on the matter today through a meeting called by the chair. To his credit, I think it was a good idea to call the meeting. However, there's no air in this balloon, colleagues. I don't understand. We can go around and offer hypotheticals about what might be, what could be, what happens months from now and years from now, but that's all hypothetical. We have to focus on the concrete. I think we have, through the statement that was offered yesterday through the Department of Finance, a very clear understanding now that the government recognizes that Bill C-208 is a matter of law.

Mr. McGowan, you offered an answer when prompted. I'm not sure who put the question. Maybe it was Mr. Fast. I remember your statement that Bill C-208 is now the “law of the land”. Is that accurate? Can we understand it that way?

[Trevor McGowan]

You see, that's part of the difficulty in answering the question, because the announcement was not to delay implementation of a bill passed by Finance. Rather, it was to table a bill in Parliament that would, if passed by Parliament and given royal assent, provide that amendments, or rules in the Income Tax Act that had been implemented through Bill C-208, apply starting as of January 1, 2022. Of course, as we discussed, the amendments to the Income Tax Act were made on June 29. There was nothing that could be delayed on that front.

As I have said before, including before the senate committee on agriculture, the CRA would apply the law as enacted, because it is the law of the land, barring some future Parliament action.

[Trevor McGowan]

As I said, the five-year holding period imposed by the rules enacted by Bill C-208 applies to the purchasing corporation and not the child. The child could sell within that period. It does not actually provide an effective rule that would require the child to indirectly hold shares for five years.

I should say as well that the government's news release that went out yesterday did not provide specific amendments that would be made. Rather, it announced a general set of issues that would be taken into consideration in the development of draft legislative proposals. Those included the transfer of legal and factual ownership of the corporation to the child, the extent to which the involvement of the business is transferred from the parent to the child, and some other measures like that. It was more a description of the types of issues that would be considered in the development of draft legislation than a specific set of draft legislative proposals that was announced yesterday. The draft legislative proposals, I think, would be released at an early opportunity and then subject to comments. The final draft legislative proposals would be released later on.

[Trevor McGowan]

There are a few technical issues with that. First of all, the amendments enacted by Bill C-208 place the five-year, or 60-month, holding period on the corporation that purchases the shares from the parent, and not the child. There's actually no requirement in Bill C-208 that the child maintain any sort of share ownership in the business. It's the corporation that purchased it. The child could, in fact, sell the shares of the [Technical difficulty—Editor] within the five-year window.

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

One of the requirements or the amendments being made was that enough time and a specific timeline be put forward for that transition to ensure that it was a legitimate.... It's the idea of a legitimate sale to a child. Within that Bill C-208 legislation, it also says, though, that the person receiving the gift of this farmer or small business would have to own it for five years. Why is that not good enough within the Bill C-208 legislation?

[Trevor McGowan]

That's correct. The amendments relating to Bill C-208 apply only where an individual sells shares to a corporation owned by their child or grandchild. On a direct sale of shares from a parent to their child, the anti-avoidance rule in section 84.1 would not apply, to cause there to be a dividend. In fact, assuming all the conditions are met, the lifetime capital gains exemption can apply to eliminate tax—or up to the lifetime capital gains exemption limit anyway—on any gains.

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

Okay. That's fair enough.

Could we then discuss those specific amendments that are being brought forward and that were in the newly released press release in which clarification was provided? It's my understanding that the government said that parents could already sell to their children on a tax-free basis, using a lifetime capital gains exemption, before this Bill C-208 was brought forward. Is that true or is that false? I believe it was in a speech from Mr. Gerretsen, actually, when he was discussing Bill C-208.

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

Thank you, Mr. Chair.

I want to back things up a little and go back into the history of this bill. As Ms. Dzerowicz mentioned, there were several iterations of it. Of course I refer to the NDP version of this, Bill C-274, which was actually voted against by this government, and which we were told would not pass.

However, after the election, in budget 2019, it was indicated that a similar piece of legislation would come forward to help farmers, small businesses and fishing businesses, and in fact it was also in the minister's mandate letter from the Prime Minister.

Can you indicate to this committee what plans and what directions were received from government, from the minister as directed by the PMO, to put forward this legislation? I think, to build upon what my colleague Mr. Ste-Marie was discussing, with all of that time and with those plans in place, why were a lot of the amendments that came forward under Bill C-208 not prepared for legislation?

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

Pardon me, Mr. McGowan. I don't think I made myself clear. I meant that it was up to members of the government, not public servants or senior officials, to bring forward amendments that would have addressed the concerns you raised with the government regarding this bill.

My question is this. Did the government ask you to draft amendments to rectify the potential problems resulting from Bill C‑208, amendments that could have been proposed when the bill was being studied by the committee? Did the government ask you to draft such amendments?

[Trevor McGowan]

As part of our committee appearance this spring to discuss Bill C-208, the departmental officials were present to help explain the technical aspects of the bill, and I would need to defer to the honourable chair of the committee in terms of the rules. I'm not even aware of whether departmental officials could table amendments to a bill at a committee hearing, or whether that would have to be done by another—