Finance Committee on March 9th, 2021

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

Thank you, Mr. Chair.

I want to begin by informing you that my colleague Sébastien Lemire will replace me during my second round of two and a half minutes. I will be asking questions in this round.

I want to begin by thanking all the guests for their presentations and their answers. This is very useful and enlightening.

However, I must say that I am disappointed. I'm not disappointed by your presentations, far from it. I sense among you the same thing I sensed among the previous panel, which was more focused on agriculture. I sense the consensus, the will to move forward and do things properly. That's important. Just about everyone shares this point of view, as far as I know. This should have been done a long time ago. My disappointment has to do with the fact that, when the bill was put to the vote in the House at second reading, unless I am mistaken, 146 members—145 Liberal members and one independent member— voted against it. At second reading, we vote on the principle. In this case, the idea is to make the lives of families easier when a business is sold to a family member to ensure succession. We want this transaction to be able to occur according to the same rules as if the sale was concluded with a third party. I cannot believe that people voted against that principle.

Among the arguments I have heard, there is the issue of a potential tax shortfall. However, I would like to remind you that the figures from the Parliamentary Budget Officer indicate that this is acceptable. After all, it must be fair. It shouldn't be less beneficial to sell your company to a family member or your children.

The remaining argument that has been raised a few times so far is that we don't want the bill to be used to create a tax loophole—in other words, to allow financial packages and tax schemes to reduce the tax to be paid. I am a member from Quebec, so I can tell you that the Government of Quebec made this change and created guidelines to ensure this would not happen.

So there are guidelines that make it possible for the system to work properly and to simplify the lives of families in order to ensure succession. How can we reassure the Liberal members who voted against the principle of this bill at second reading?

I would like to hear your comments on this. Mr. Janzen can begin, and Mr. Kelly can complete the answer.

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Janzen.

[Brian Janzen]

Thanks for the question.

Yes, I do think Bill C-208 does have enough guardrails, at least initially. As someone who has practised for 34 years, I'm going to preface this by saying that someone will always find something. Even if you think you have the proper guardrails now, you may have to tweak them later. We're all in favour of that.

Getting back to this particular thing, I really think the five-year time frame—if it's sold in the meantime and mom and dad pay their taxes as they would have without this bill—is a great provision. There definitely are some guardrails there.

Second, it just doesn't work to do an internal strip, the way Bill C-208 is set up. The internal strip, where you're taking out surplus without having a real sale, is where all the abuse happened in the early nineties. That is why section 84.1 was introduced. This bill really also helps for that.

Also, as I said with respect to the threshold for the value, these are the smaller businesses. This is not going to be, all of a sudden, undertaken by rich, rich, rich families to try to take advantage of it. With the guardrails, between the value and the time frame, I think this is perfect for the beginning of the bill. If it does need to be tweaked later, so be it. For now, though, this is a great limitation for any abuse, in my mind.

[Daniel Kelly]

I am just coming in behind that. Thank you so much for the question. I agree with your sentiment entirely.

In 2017, CFIB got involved in a little dust-up with the federal government over some small business tax changes that were being proposed. We had a tiny argument with the previous finance minister about that very issue. Many of the concerns behind that are similar to this.

One of the things that the government doesn't do well—and I'm not just talking about a political party here but even the department—is reach out to the business community, to the accounting community, and say, “Okay, we're seeing some problems with this aspect of the Income Tax Act. What can we do to shore it up without creating massive dislocation and unintended consequences?”

That does not happen often enough, I have to tell you. I agree entirely with the previous comments, that we should give this a try. If there is significant tax leakage, I believe all of the members presenting to you would be happy to talk to government, talk to the department about ways we can tighten up the rules if somebody finds a creative way to abuse these particular provisions. Business associations, my own included, have no time or tolerance for that. We want to make sure that we have an effective tax system.

I'd encourage you to pass the legislation. Then, if there are problems down the road, we can ask the department to amend as we go.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

We are turning to Mr. Julian, followed by Mr. Falk.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair, and thanks to all of our witnesses for being here today. We hope that you and your families continue to be safe and healthy during this pandemic.

I'm going to start with a question for Mr. Janzen and Mr. Mansfield.

Just so we're clear, neither of you has identified any elements of this bill that show evident weaknesses. You are just showing due diligence by stating that if anybody is able to find loopholes in the bill, we need to make sure we review them and fix those loopholes. However, you don't see any evident loopholes. Is that correct?

I'll start with Mr. Janzen.

[Brian Janzen]

That's correct. Since the bill is available to the public, my group and I have gone through it. If anything, we'd like to see it go a little further—we always do. But no, as much as I have said there are potential loopholes, we haven't seen any. With the two things I mentioned earlier, those are good safeguards to ensure this is done as it is intended. That will allow for the succession of family businesses on a level playing field.

No, I don't see any potential loopholes at this point. That would be my point.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

You're just being prudent in saying that if ever there was one, we need to be following up on that.

[Brian Janzen]

Yes.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

As with any legislation, we need to make sure it's doing what it's intended to do. Given that this bill comes from Guy Caron, who was an NDP member of Parliament and almost brought it through, and now we have a second attempt, we've had the scrutiny both times.

[Brian Janzen]

I have one last comment. What can often happen—and has happened throughout the history of the tax act—is that all of a sudden another piece of legislation might be introduced with no real correlation to this section, but it may inadvertently trigger a loophole.

You have to keep monitoring this, and that can be done in the future, but right now this has really good safeguards.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you.

Mr. Mansfield, I have the same question for you.

[Dustin Mansfield]

Having gone through the same analysis of the pieces that are added, it's always a little difficult from our standpoint until we see CRA's interpretation of how they or the minister would apply it. There are a few safeguards in there that would certainly help.

There is also one in there that says the taxpayer must provide the minister with an independent valuation; therefore, there has to be an independent valuation of the business and it has to be provided to the minister. Based on this and how it would work, whether that's an election form or otherwise, it's going to be provided to Finance or to CRA in some regard, as well as an affidavit signed by the taxpayer and the third party.

I suppose when we talk about some of the abuse that comes into play, depending on what that requirement looks like when it's enacted, if you were asked to sign an affidavit with somebody who is legitimately selling a business versus not, that will create a fairly large check and balance in something being submitted to the government in regard to that.

As Brian said, there are always ways.... If you look at legislation that has been in practice long enough, as things change the dynamic, ways can come into play where it could be misused. However, in something like this, it's always about how much that potential misuse would cost and whether an additional provision could be added if the Department of Finance sees a potential to do that in some transaction.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you.

Now I'd like to move on to Mr. Kelly, Ms. Young and Ms. David.

I asked the previous panel, and I will ask you the same thing. Where do you see this 15 years down the road, in terms of business transfers, if we don't have this legislation, as opposed to having this legislation? I mean this in terms of the impact on the transfer of family businesses, financial impacts, all those things. If you could look into a crystal ball and compare the two scenarios—one with the bill, one without it—what is the difference?

I will start with Mr. Kelly.

[Daniel Kelly]

We have been talking for a long time about the tsunami of business transfers that is expected. I suppose the positive news is that a lot of business owners get to the age of normal retirement and then look at the business, look at the contributions they are making to society by keeping the business going, and then delay their retirement, either because they love doing what they're doing or because they feel they need to ensure that the business stays in that local community because of its contributions.

We had time before demographics started to take hold, but we've run out of that time and we need to be prepared because the clock is not getting kinder to us. At some point, these business owners are going to need to or will be forced to exit their businesses, and at that stage we're moving into a tough environment. If we see the bleeding of our local communities, rural communities, neighbourhoods in big cities, and small, independently owned and operated businesses, and their replacement with giant companies that own everything on the block, as Robyn mentioned, I'm not sure that is the kind of Canada all of us would love to live in.

I think we need to take this very seriously, and I'm hopeful that this legislation will make it across the finish line.

[The Chair, Liberal, Wayne Easter]

Who else wanted to answer that question?

Was it Ms. David?

[Cindy David]

Yes. I'll chime in here.

A lot has been said on concerns about the unintended consequences of this legislation with regard to loopholes and large private corporations perhaps taking advantage of something that we hadn't intended. I would point out that if we do nothing, we're riddled with unintended consequences. Since this legislation was put in place.... It has been in place for a number of decades. One may wonder why we continue to push this forward: It's because the way we've taxed small businesses has actually changed within the framework of this legislation. The dividend tax has gone way up compared to what it was back in 1986, when this first affected small businesses.

Again, I'll just point out—if you could write this down on a piece of paper—that in our brief, which you will get on Friday, on page 5 we provide specific examples so that you can see how the tax has changed from 1986 to the current day. It has become very punitive. It actually highlights the fact that family businesses have a clear disadvantage today that they didn't have several decades ago under the exact same legislation that we have in place.

I'll leave you with this. Bill C-208 actually phases in a provision that disallows the exemption for the capital gains for larger companies. It already takes care of any potential leniency for large businesses and really is in favour of smaller businesses, which care more about using the capital gains exemption.

[The Chair, Liberal, Wayne Easter]

Okay. We'll have to move on, as we're considerably over time on that one.

We're turning to Mr. Falk, who will be followed by Mr. Fragiskatos.

Go ahead, Ted.

[Ted Falk, Conservative, Provencher, MB]

Thank you, Mr. Chair.

I want to thank all of our witnesses for coming to committee today. You have brought a lot of clarity in your presentations and in your responses to the questions as to what the bill is, what it will do and your perspective on it.

In my opinion, Bill C-208 is a bill that seeks to do one thing, and that is to address the inequity for small business owners, farmers and fishers who wish to sell their business or their enterprise to their family or their children. What it does is that it allows them to use the capital gains exemption, which they wouldn't be able to use currently for that but are able to use if they sell to a third party.

Mr. Janzen, you're from my home province of Manitoba. I'd like to ask you a few questions. You've indicated that this has been a thorn in your side for 34 years and that it is something you wish had been addressed sooner. How frequently do you encounter a situation where this would apply?

[Brian Janzen]

I'd say, without over-exaggeration, every day.

I'll just back up for a second. I don't think this has been said today, but section 84.1 is the section of the act that accountants get sued on more than any other section of the act, because it's so prevalent, it's not logical and it's not fair. A practitioner who doesn't have a tax group gets caught by this. It's there all the time, because it doesn't just apply....

I have another example. If my client were to buy the company from his brother, who inherited it from their grandfather, there's so much information that will affect future taxation, and they may not have this information. If the brothers are not speaking.... My client, brother number two, needs to know what brother number one claimed for his capital gains exemption.

To answer your question, section 84.1 is so prevalent. It applies in virtually all.... It's always in the back of our minds for any private enterprise, whether or not they're going to sell to their family. Any time we do a restructuring, it could inadvertently apply and trigger a dividend when you didn't think there would be one.

This bill doesn't fix all that stuff, but it really fixes what it needs to start.

[Ted Falk, Conservative, Provencher, MB]

I was going to ask you about that. Do you think section 84.1 as addressed in Bill C-208 adequately addresses some of those issues that you're struggling with on a day-to-day basis?

[Brian Janzen]

It does.

[Ted Falk, Conservative, Provencher, MB]

Okay.

What are your thoughts on the guardrails that have been embedded into the bill, the five-year period for resale of those shares?

[Brian Janzen]

I think that's fair. As we said, those of us who have been advocating for the change to section 84.1 don't want it to be abused. We think the section needs to stay there for abuse, but these guardrails prevent that. These guardrails make it apply to legitimate succession planning, legitimate transactions between parent and kids, or grandparent and kids.

I think they are fair. As I said, it doesn't take long to get to a $10-million value, and that's where this phase-in starts to apply. If I had my druthers, I would like to see that threshold be a bit larger, but I'm totally fine with this as a starting point.

[Ted Falk, Conservative, Provencher, MB]

I was happy to hear, as you clearly explained in your presentation, that the way the bill is written it is most advantageous to small business owners and doesn't provide an undue benefit to large corporations.