Finance Committee on March 9th, 2021

[The Chair, Liberal, Wayne Easter]

Basically, you're suggesting Bill C-208 go as is and that Finance, as soon as possible, amend 84.1 to deal with the concerns you have.

[Kevin Wark]

Well, they are not our concerns, they would be Finance's concerns.

[The Chair, Liberal, Wayne Easter]

Finance is always concerned.

Mrs. Jansen, you're next.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Thank you.

The small family businesses that this most impacts would be the ones least interested in having a discussion about this. Their eyes would roll back in their heads when you start talking about surplus drippings and 84.1. We need to get this right, because these are the people who are most impacted.

I would like to talk to Mr. Mansfield. I'm trying to work myself into a way that I can understand this. You're saying that section 55 currently makes siblings unrelated—that they're not related people—and because of section 55, assets need to be split between siblings.

I heard a story of a printing shop that was owned by a family, which passed it on to the kids in such a way that the warehouse went to one sibling and the printing machinery went to the other, basically tearing the company apart.

Is that actually how that works with section 55?

[Dustin Mansfield]

That is correct. You can imagine the joy I get sitting in a boardroom and telling two siblings that they are unrelated for the purposes of splitting up the business. They sometimes question, at that point, whether they should be talking to me or somebody else on the matter. For the purposes of section 55, siblings are deemed to be unrelated. There is a provision in one part of section 55, which is probably one of the most complicated sections in the act.

It is a big challenge from that standpoint, specifically in our area here in southwestern Manitoba. I think I heard on the previous panel a lot of discussion about the growth of corporate farms. I remember the 2016 census. I think they grew to be 22%, up from 11%, in the five years since the previous census. What we're now seeing is that a lot of those farms that were started by maybe a father and mother are now with those siblings. You have one, two or three siblings operating a farm together and you try to split that farm into two, because, of course, the longer you leave it, the bigger that family tree will grow and the more complicated the dynamics of the family relationships will be.

For purposes of following the provisions in paragraph 55(3)(b).... I have heard in arguments from the other side that they can still use that provision. There is a 1% tolerance on the asset types. As you can imagine, these parties are unrelated for the purposes of that section, but they're related for the purposes of determining the value. It becomes very complicated to actually make something fit the rules.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

It's terribly complicated. Let me tell you, siblings definitely do not consider themselves unrelated when they've been working together in business. If you now look at section 84.1.... I understand that in that section family members are related. The reason we make them related there is that we're so worried that family members are just trying to game the system.

Can you share a story with us in which a family sold to a stranger because they couldn't afford the tax hit of selling to their child?

[Dustin Mansfield]

Sure. It definitely comes into play. Sometimes it's not even that the sale is to the third party; it's that it creates awkwardness in the family dynamic since often individuals will come in assuming that their capital gains exemption is on the table. They've operated their business for 25 years. They've grown it up. They've heard about the capital gains exemption over their career, and they come in and say, “Okay, I'm ready to sell to my child, realize my capital gains exemption, and retire,” to which you tell them, “If you sell to your children, you cannot.” If the children are in the room at the same time, it creates an awkward situation, because now you're pinning the family business and how it's treated against the mom and dad's exit from the business.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Right.

[Dustin Mansfield]

It can be in an actual situation, but also just create awkwardness in the dynamics of trying to do a proper transition.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Here we have section 55, in which they're unrelated, and section 84.1, in which they are related. Can you explain the incoherence of this? This makes absolutely no sense. These small businesses are not trying to game the system. They're small businesses that have huge impacts on our communities. They're doing amazing things for our neighbourhoods, and we're going to call them tax cheats...? Is that the only purpose of this?

[Dustin Mansfield]

I think the provisions that are in place are there for anti-avoidance reasons. Obviously, there are many ways in many sections of the act in which anti-avoidance reasons exist. The section 55 one is an interesting one. Bill C-208 tries to tie it to the status of the shares themselves, which creates a protection from that level, which is positive.

You are exactly right. It creates an awkwardness when you're unrelated for these purposes but related for those purposes, so it just becomes very confusing in an already confusing situation.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

I understand that if the transition takes place over many years, there are some workarounds, but with many small businesses there's a sudden death or injury or something that takes the parents out all of a sudden. In such a case, what happens now?

[Dustin Mansfield]

I think in that type of scenario, if mom and dad pass away and the kids decide to carry on the business, on their passing a deemed disposition of their assets at the last will of mom and dad, depending on the will, happens.

If a capital gains exemption is claimed on their passing, then those shares wouldn't be able to be transferred to a corporation; at least that capital gains-exempt value could not be used. Therefore, you're into the same scenario, in which you sometimes take on personal level debt to pay out the other siblings. There may be other siblings in the estate who aren't taking over the business.

The terms of section 84.1 are always a very big area of concern for us as practitioners, but also for clients—sometimes not even with regard to the use of the exemption, but just with regard to the specific sale itself, as Brian alluded to earlier.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Bill C-208 would just level the playing field, is what you're saying.

[Dustin Mansfield]

Bill C-208 would work to level the playing field in that situation.

[The Chair, Liberal, Wayne Easter]

Okay, we will have to move on.

I might say this to the other witnesses: If you do have a point that you want to raise on a question but it wasn't directed to you, just raise your hand, and hopefully I will see it.

Ms. Dzerowicz has six minutes, followed by Mr. Ste-Marie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I just want to thank everyone for their excellent presentations—particularly you, Mr. Mansfield. I think this was the closest that I could actually understand in layperson's terms exactly what we're talking about today, even though you should know I am the daughter of a farmer. However, I am a downtown Torontonian, born and bred, so I cannot pretend that I know the workings of anything to do with transfers.

I will tell you my bias. I really would love to find a way for these intergenerational transfers to happen in a fair and more affordable way.

My questions are directed in terms of how there must be some reason why this has come before the House of Commons as a private member's bill three or four times but has not passed. I'd like to start trying to figure out how we can address some of those roadblocks.

Mr. Wark, I'm going to start with you and just continue along the lines of what the chair was asking you previously, where you indicated that there were probably some concerns within Finance in terms of guardrails and limitations. Do you have any specific recommendations about what additional guardrails we can put into place that might actually strengthen this bill and address Finance's considerations?

[Kevin Wark]

Well, I think one concern that has been raised relates to future sales of the entity and whether it could revert back to the original owner. There may be some structuring that could go on that would allow the company to move back in one form or another. I think that's an area that could be looked at and could be easily fixed, and I think it could be done after the fact as much as before the fact.

I'm not sure how many of you recall this, but when this bill was introduced by Guy Caron in 2016-17, when it was being debated in the House, projections were put forward that the cost of implementing this bill would be in the range of a billion dollars. I think that caused reflection by a number of members in terms of whether the bill should proceed or not. However, the PBO's office came out afterwards, and the number was significantly lower than that. They also assumed that the sale would not otherwise take place to an arm's-length purchaser; they just said that if all these businesses were ultimately sold to family members, there is a kind of tax loss.

I think we've come a long way in terms of understanding the impact of this bill and understanding the value of making this change. The group here, I think, all have the same perspective that there should be changes, that it's a question of how to best effect them.

Again, the concern we have is, if this bill doesn't proceed, how much longer will it take for it to get back in front of this group again? In the meantime, it creates significant uncertainty for small business owners doing their planning, and Dustin mentioned that it's not only dislocative to the sale process but also to the family.

We heard similar stories where people were unaware when they started their planning and started to move the family business on to the next generation that they cannot structure it in a way that's tax-effective. It is very dislocative to a whole company, because all of a sudden the parents start needing to contemplate whether a sale should take place to a third party, which should not have to take place.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you. Those, I think, are two important points.

I don't know if Mr. Mansfield and Mr. Janzen have something to add. Would you agree that those have been two sorts of roadblocks in the past?

I appreciate what you've indicated, Mr. Wark. Are there any other roadblocks or is there anything else you think we should be identifying so that we can try to find a way to move forward? Does anybody want to respond to that?

[Dustin Mansfield]

Sure, I can quickly respond on that.

I did have my mom and dad and my wife read my statement to help with that part, as my wife tries to explain dentistry to me from time to time and I don't understand it either.

To back up Kevin's comments, I think I've read between the lines on some of the comments from the party members in terms of whether the parents can sell the shares of the purchaser corporation back to the parents—because the provision currently includes a restriction of five years where the shares of the corporation itself are sold. However, what I thought was quite interesting—and I do give a lot of credit to the individuals who went down the road with this bill, because interpreting and writing tax legislation is not easy—is that it does have a lot of guardrails.

I think what Mr. Wark has brought up are certainly some of the concerns that I would assume Finance would have, just from my experience in the career. However, I don't think they're impassable. I think there are pieces that could be added to make this thing work for the purposes of use and practice.

[The Chair, Liberal, Wayne Easter]

Julie, this is your last question.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

The last question is for Mr. Kelly.

Mr. Kelly, you have recommended simplifying the LCGE and expanding it to include at least some of the assets and increase the LCGE amount to $1 million. Are you proposing that as additional changes to strengthen Bill C-208, or are you indicating that's something we should be considering moving forward?

[Daniel Kelly]

I would not suggest that we delay this piece of legislation. To the points that were raised earlier by Mr. Wark, we need to see some movement on this. We've been waiting. We've been hoping that a government and opposition parties would align to make this happen, and perhaps this is our moment in a minority Parliament to do just that.

I don't suggest that we delay it. Those are further recommendations, though, and things we hear an awful lot from business owners.

On the previous point that was raised, I understand that officials in the Department of Finance have a difficult job to do. They need to make sure that they do not create scenarios for tax cheating and that they are also fiscal stewards of the national treasury. However, we've seen this movie before. Often in the Department of Finance, anything that is regarded as a tax expenditure, like specific measures to support small and medium-sized firms, is met with a fair degree of skepticism. To discourage parliamentarians from moving on them, they often vastly overestimate the amount of potential revenue loss that will happen, and I suspect that's what has happened in the past here.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We'll turn to Mr. Ste-Marie, followed by Mr. Julian and then Mr. Falk.

Mr. Ste-Marie, go ahead.