Finance Committee on March 9th, 2021

[The Chair, Liberal, Wayne Easter]

I call this meeting to order officially. Welcome to meeting number 25 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of February 3, 2021, the committee is meeting to study Bill C-208, an act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).

Today's meeting is taking place in a hybrid format, pursuant to the House order of January 25, 2021, therefore members are attending in person in the room, and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. I would like to remind members to turn off their mikes when they're not speaking.

With that, before we go to witnesses, Mr. Kelly, you have a quick point of order.

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

I had even hoped to deal with it informally ahead of time, if we could have. I know we're behind now, so this may not be possible, but I had hoped—if we could get the brief opening statements from both panels and a full round of questions with some time to spare—that we might get to clause-by-clause today and thus be able to return this bill more quickly to the chamber.

I'll leave it with you, Mr. Chair, but that would be what I suggest we do on this bill in the name of expediency.

[The Chair, Liberal, Wayne Easter]

I'll try to talk to the clerk while we're meeting, to see if it's possible to do that. I don't know if the logistics are together to do it.

With that we will turn to the first panel of witnesses. First we have Scott Ross, assistant executive director, Canadian Federation of Agriculture.

Scott, the floor is yours, and if you could hold it to about five minutes, that would be dandy.

[Scott Ross, Assistant Executive Director, Canadian Federation of Agriculture]

Thank you, Mr. Chair and committee members, for the opportunity to speak to you today.

My name is Scott Ross. I'm the assistant executive director of the Canadian Federation of Agriculture, Canada's largest general farm organization, representing nearly 200,000 Canadian farm families from coast to coast to coast.

I would like to start by thanking the committee for inviting farm organizations to speak to Bill C-208, as the continued facilitation of farm family transfers is an issue of critical importance to the CFA and its members.

Agriculture is a capital-intensive business, and effective succession planning is critically important, particularly for a sector that will transfer tens of billions of dollars in assets to the next generation in this decade alone. It’s undeniable that COVID-19 has fundamentally affected Canada's and the world’s economic outlook, and while Canadian agriculture is certainly not immune to those effects, the sector is uniquely well positioned to drive Canada’s economic recovery.

However, the average age of Canadian farmers now exceeds 55 years of age, and the opportunities these businesses face will carry into the next generation. As a sector where the vast majority of businesses remain family owned, maintaining the financial health of these businesses across generations is critical. This is in the interests of all Canadians, as studies show that family farming encourages sustainable growth, environmental stewardship and increased spending within one’s local community, not to mention its contributions to the social fabric of rural Canada.

With respect to Bill C-208, I would begin by noting that I’m not a tax expert. However, in 2012, I convened and supported a taxation committee at CFA, comprising tax practitioners and farm leaders from across Canada, with a mandate to identify and review the most critical tax-related issues facing Canadian farmers.

Section 84.1 of the Income Tax Act and the disincentive it presents to family farm transfers—a primary focus of the proposed amendments under Bill C-208—was promptly identified as a priority by this committee and has been a focus of the CFA ever since. This was reiterated just two weeks ago when farm leaders from across Canada passed a resolution at the CFA’s annual general meeting, imploring the federal government and members of Parliament to support and actively contribute to the passage of Bill C-208 before the next federal election, as a priority for Canadian farmers.

Simply put, the current wording of the Income Tax Act penalizes a farmer if they choose to transfer the farm business to a family member as opposed to an anonymous third party. As a result, when a retiring farmer sells their business to their children, they face the prospect of paying a lot more in taxes than if they were to sell to a stranger. This difference in treatment can amount to hundreds of thousands of dollars. This amounts to reduced productivity, increased financial risk and lost opportunities at a time when the sector holds such immense growth potential.

There are over 43,000 family farm corporations across Canada, operating on more than 50 million acres of land. The transfer of each one of these businesses, were they to stay in the family, would be disadvantaged and face this undue tax burden. The CFA supports Bill C-208 because it essentially ensures that real family farm transfers can access the same capital gains treatment as businesses selling to an unrelated party, rather than treating the difference as a dividend that's taxed at a higher rate and cannot access the lifetime capital gains exemption.

The CFA also supports the safeguards in Bill C-208 to prevent surplus stripping by assuring that a real transaction has taken place. For example, if the shares are sold by the child within five years of acquiring them, the transaction is deemed to have involved dividends and taxes will be charged retroactively. We are not seeking an exemption or preferential treatment for family farms, but instead are looking to ensure the Income Tax Act recognizes real intergenerational farm transfers and treats them accordingly.

In conclusion, I'd like to thank the committee for its time and reiterate that the CFA seeks your support for Bill C-208, as it addresses an undue tax disincentive to the continued vibrancy of family farming in Canada.

Thank you. I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Ross.

We will turn to the Fédération de la relève agricole du Québec, with Julie Bissonnette, president, and Philippe Pagé, general director.

Go ahead, Ms. Bissonnette.

[Julie Bissonnette, President, Fédération de la relève agricole du Québec]

Good afternoon.

Mr. Chair and members of the committee, thank you for inviting us to speak to the committee about the transfer of farms.

My name is Julie Bissonnette. I am a dairy farmer in L'Avenir and the president of the Fédération de la relève agricole du Québec, or FRAQ. With me today is executive director Philippe Pagé, who grew up on a hog farm in Saint-Camille.

Before I turn to the subject at hand, I would like to tell you a little bit about the group I represent.

The FRAQ is an organization that brings together 16- to 39-year-olds who care about farming. With over 1,700 volunteer members across Quebec, the FRAQ is affiliated with the Union des producteurs agricoles.

Our organization is dedicated to advocating for young farmers and achieving better conditions as they start out in farming, whether they are taking over an existing operation or starting a new one.

We are here today to stress the importance of immediately correcting the tax unfairness surrounding the transfer of a business, depending on whether the parties are related or unrelated.

The next generation of business owners has been speaking out about the problem for more than 15 years. Hopefully, this time, it will be fixed once and for all.

We realize the bill concerns all small businesses, but we would like to share the perspective of young farmers in Quebec. There's a problem that needs fixing: right now, it is harder for someone to sell their farm to their son or daughter than to a person outside the family. You should know that many young people in Canada are watching their dreams go up in smoke because of ill-conceived tax rules.

Under the current system, a person looking to sell their farm has two options: sell it to their son or daughter and agree to be taxed to the max or sell it to a stranger and receive better treatment under the Income Tax Act. Basically, a farmer will have to pay more tax if they sell their farm to their son or daughter, and as a result, fewer farms are being transferred to family members.

Naturally, the person looking to sell is going to choose the option that provides the most benefit. After all, the sale of a business is the culmination of a person's life's work. What is unfortunate is that the current provisions of the act force farmers to make the tough choice between keeping the farm in the family and having more money in retirement.

Bill C-208 would amend the Income Tax Act to allow a business owner selling the business to a related party to benefit from the same exemption they would receive when selling to a third party.

The FRAQ strongly supports the bill because it fixes the problem for good.

Bill C-208 is significant for young farmers because we believe it will encourage the transfer of farms to family members and go a long way towards correcting tax unfairness, while supporting a strong farming community.

The numbers speak for themselves. A business that is transferred to a family member is six times more likely to succeed than a business transferred to someone outside the family. What's more, 70% of all entrepreneurs in Quebec would prefer to keep their businesses in the family. Even today, selling a business to a related party is the preferred way to transfer a farm. Our tax system should support all young farmers, no matter their path to business ownership, something the system does not currently do.

With the average age of farmers increasingly nearing retirement age, a large number of farm businesses will be changing hands in the next few years. This is about more than just tax fairness. It's about support for farm growth and development across Canada and proper stewardship of our land. I hear from many young people that their parents are getting older and approaching retirement. Amending the Income Tax Act would change their lives. It is paramount that the government take action now because many farmers will be selling in the coming years.

Farmers are passionate and proud people. You can just imagine the pride and gratitude they feel when a family farm stays in the family. You can also imagine what it feels like when that doesn't happen. Losing a family farm is like giving up on a dream. All that hard work is for naught. That is the reality of the current system.

We urge government and opposition members to work together not only to correct this unfair tax treatment, but also to make the changes that good governance of the Income Tax Act calls for.

In conclusion, I want to reiterate our support for this bill, just as we have supported all of its previous iterations in recent years. Changing the law to treat family business transfers more fairly is a matter of consensus across all sectors.

Selling a business is riddled with challenges as it is; the process is long and complicated, and requires careful planning. Why make it even harder when it is a parent selling their farm to a son or daughter? Is the goal really to keep fewer farms in the family because of unfair tax rules?

Hopefully, young farmers and farm owners who wish to sell will finally be heard.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

We will turn to the Grain Growers of Canada, with Andre Harpe, chair, and Branden Leslie, manager.

Go ahead, Andre.

[Andre Harpe, Chair, Grain Growers of Canada]

Thank you very much, Mr. Chair and honourable members, for the opportunity to be here with you today.

My name is Andre Harpe and I am the chair of the Grain Growers of Canada. Grain Growers is the national voice for Canada's 65,000 grain, pulse and oil seed farmers across all of Canada. I farm in the Peace region of northern Alberta. When we finish harvest this fall, we will become a century farm, which represents one hundred years of our family farming this land. We grow malt barley, and canola is our mainstay. We also rotate other crops year to year.

My father incorporated this farm in 1972, before I took over the farm from him in the 1980s. Like many other farmers my age across the country, I'm beginning to look at the future of my farm. Succession planning is a challenge; it's expensive and must be done right.

I am also the proud father of three girls, and they all love the farm. I can't say for certain just yet, but I believe they are all interested in possibly taking over this farm one day. That decision will ultimately be up to them, but I would love to keep this farm in my family for another hundred years. Beyond that, I would be happy to see our sector benefit from fresh, new ideas for farming from young women like them.

There is an old saying that many farmers are cash poor and asset rich. Although the debt owed on my assets may not jive with the word “rich”, the reality is that my farm is my retirement. The equity I've built through the years of hard work is my RRSP—it's my pension.

The structure of cash flow for a farm necessitates that you're turning profit back into the operations to pay down debt, purchase inputs and prepare for the following growing season. When I sell my farm to my daughters or somebody else, that's when I finally see the results of the years of hard work. Most business owners, farmers or otherwise, are in the same position, and we knew that going in.

I scratch my head to understand why, for even one second, I would have to consider whether or not I should sacrifice any part of my retirement in order to pass my farm on to my children. I should not have to weigh the decision between a lower quality of life in retirement due to significantly higher taxes to keep the farm in my family, and maximizing my retirement by selling it to a third party buyer. This isn't about special treatment; it's about fairness.

I've heard it mentioned that because we are incorporated, it must mean we're not a family farm. This couldn't be further from the truth. My farm is actually part of 97% of farms in Canada that are family farms. In my view, Bill C-208 would help it stay that way.

If my daughters choose to take over the farm, hopefully start families and stay on the land, it is also good for our local communities, which makes it good for Canada. The sustainability of our rural communities is vital, and levelling the playing field so that it is advantageous to sell it to a family member would help keep people on the land. It'll also help keep our schools, sports teams and communities alive.

There have been questions surrounding whether this bill would create tax loopholes that could be taken advantage of. The next panel will include many tax experts, so I will defer to them on the safeguards built into this legislation. What I know is that farmers often have to make decisions based on a risk-benefit analysis every day, just as you do in your roles. I would suggest that the risk of that being prevalent among farms as part of their succession plan, compared to the benefits for family farms in rural communities, is clear.

In closing, the Grain Growers of Canada are strongly in favour of this legislation, and we encourage parliamentarians to pass it into law in an expedited manner to ensure tax fairness for those currently deliberating this issue today. Not all farms are going to be transferred to the next generation, but for those that have the chance, Bill C-208 will go a long way to ensuring that farmers don't have to choose between keeping the farm in the family and getting the most out of retirement.

Thank you, Mr. Chair. I look forward to any questions you may have.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Harpe.

Turning to the last witness in this panel, we have the Union des producteurs agricoles, Marcel Groleau, general president, and Marc St-Roch, accounting and taxation coordinator.

Mr. Groleau.

[Marcel Groleau, General President, Union des producteurs agricoles]

Thank you, Mr. Chair.

Good afternoon, members of the committee.

My name is Marcel Groleau, and I am the general president of the Union des producteurs agricoles, or UPA. With me is Marc St-Roch, a specialist in agricultural taxation. He has the expertise to answer more technical questions.

The agriculture and agri-food sector is responsible for one in eight jobs, generating more than $112 billion in annual revenues and exporting more than $60 billion worth of products every year. The backbone of many rural areas, the sector is also vital to the food security of Canadians.

Some 98% of the country's farms are family owned and operated. That business model is a source of pride for Canadians. Family farming promotes sustainable growth, environmental stewardship and reinvestment in local economies.

The legal structure of farm operations has changed in recent years. According to the 2016 Census of Agriculture, the percentage of incorporated farms more than doubled in 20 years, going from 12% to 25%. As the number of farms dropped by approximately 83,000, the number of incorporated farm operations continued to grow in Canada, increasing from 32,700 to 48,600.

As has been pointed out, farmers are getting older: the average age of farm operators is now 55, seven and a half years older than the average age in 1991.

With rising asset values and, by extension, debt, farm operators have turned to incorporation to help finance investments, since corporate tax rates allow operators to pay back borrowed capital more quickly.

According to a 2017 study by the Business Development Bank of Canada, nearly 40% of small businesses will be transferred or sold by the end of 2022 as owners near retirement. More than $50 billion in agricultural assets is expected to change hands in the next decade.

Unfortunately, Canada's tax system treats the transfer of family businesses unfairly. Under the current rules, it is usually much more expensive for a farm owner to sell their business to a family member than to an unrelated buyer. By penalizing retiring farmers and young farmers hoping to take over the business, the tax rules put the country's family farms in financial jeopardy.

Pursuant to section 84.1 of the Income Tax Act, if, in order to finance the sale of a business, a person sells the shares of their corporation to a related party, the capital gain triggered by the sale is deemed a taxable dividend. That means the seller cannot claim the capital gains deduction in relation to a qualified farm property. Conversely, if the owner sells the corporation to a corporation controlled by an unrelated third party, the capital gain realized can be tax-exempt. That is unfair. Consequently, on a $500,000 gain, the taxable portion can vary by $225,000 when it should be tax-free in both cases.

In order to facilitate financing in relation to the sale of a family corporation between related persons and to allow sellers to take advantage of the capital gains deduction, the Quebec government amended its Taxation Act to include an exception to the application of the provincial provision corresponding to section 84.1 of the federal legislation. The Canadian government should follow Quebec's lead.

Canada's Income Tax Act is out of step with the realities and demographic pressures facing family farms. The UPA believes that Bill C-208 would help level the playing field by eliminating the significant costs that put farm and small business owners at a disadvantage when they wish to sell the business to a family member.

In addition, disputes arise from time to time, and as a result, owners of multi-family farms prefer to operate their businesses separately. Section 55 of the Income Tax Act sets out a mechanism whereby the assets of an incorporated business can be shared among the shareholders tax-free as long as the assets are distributed in a proportional manner.

However, the proportional distribution of assets may not be possible. Assets like farmland cannot be separated. In order for the value of the assets to be distributed equally, a shareholder exiting the business may receive more money instead of a corporation asset. In that case, if the assets of the corporation are not distributed equally, they may become taxable in the form of a non-tax-exempt capital gain.

When the business is transferred between related parties, the requirement for proportional distribution does not apply and the cash payment may not be taxable. However, under section 55 of the Income Tax Act, siblings are deemed to be unrelated for the purposes of the section. As everyone knows, these types of businesses are usually divided among siblings, meaning that section 55 penalizes parties when assets cannot be split proportionally, because it triggers taxes. As a result, the viability of each owner's business is undermined.

The UPA is of the view that the amendment in Bill C-208 to exclude transactions between siblings from the application of section 55 would also be appropriate in cases where the cash and other assets transferred to a shareholder exiting the business are invested in another farm operation. That way, the assets would still be invested in farming despite being split among separate businesses.

In conclusion, farm operations could continue to grow. They often support more than one household and are increasingly being incorporated for tax reasons and estate planning. In this new landscape, good tax planning is crucial for family farmers if family farms are to remain viable for future generations.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much to all the witnesses.

Our question lineup starts with Mr. Falk, then Mr. Fraser, then Mr. Ste-Marie and Mr. Julian, if he's back. We may have to delay going to him.

We'll go to questions right now, and I'll go to your point following the questions to these witnesses, Mr. Kelly.

Mr. Clerk, do you know if we can get an extra half-hour so that we can keep these witnesses a little longer?

[The Clerk of the Committee, Mr. Alexandre Roger]

I've not had an answer from the services yet. They're looking into it.

[The Chair, Liberal, Wayne Easter]

Okay, it's just because we were late starting.

Mr. Falk, the floor is yours.

[Ted Falk, Conservative, Provencher, MB]

Thank you, Mr. Chair.

Thank you, witnesses, for presenting today and for helping Canadians better understand the bill that's before us here. I think it's an important bill, and it's something that I certainly support.

I'd like to ask the Grain Growers of Canada a few questions. I understand from Mr. Harpe's intervention that 97% of Canadian farms are family-owned and operated. That's a remarkable figure, and I think that's something worth celebrating.

Farm families face a variety of challenges when it comes to succeeding in their operations. Can you explain to the committee some of these challenges and describe how Bill C-208 can help keep businesses under family ownership?

[Andre Harpe]

Thank you very much.

I think one of the issues with farming in this day is that it always has been a complicated business but it has become even more so, quite often because of the inability to find qualified labour, just because of the technologies. I rely on my family to be able to run the equipment that we have, just because with the technology in tractors and combines right now and even with the cost and the expense of it, we can no longer just pull somebody off the street. There's a huge training process, and we are relying more and more on our farm families.

We're using our children as qualified labour, but the thing we're looking for now is to be able to pass on the farm, and that's the tough part about it.

[Ted Falk, Conservative, Provencher, MB]

Thank you.

If your colleague Mr. Leslie wants to respond, I'm fine with that as well.

Often family farms are owned by mom and dad, who want to distribute it among their children. What are some of the dynamics that come into play when considering an intergenerational farm transfer?

[Andre Harpe]

I'll use my farm as an example. When I took over the farm, I had two sisters. Basically it goes back to how many of your children are going to want to farm. Quite often it might be all, and sometimes it might be just one. In my case, I was the only one who had an interest in the farm.

Basically we have to look at not only the child taking over the farm but how the other children are treated. There are issues like that, such as equality. It also goes back to the ability to manage a farm. Not just anybody can farm.

Branden, do you have anything to add to that?

[Branden Leslie, Manager, Policy and Government Relations, Grain Growers of Canada]

I was thinking, Mr. Falk, that's a good question in itself and that builds on some of the problems as to why this bill is so relevant. There are so many factors at play when it comes to succession planning and continuation of the family farm. I think it's fair to say it's an undue additional burden to have the consideration of whether or not you should take an additional loss on taxes just to do that. There are already enough considerations in the mix. I think this is a point of fairness that's very timely, as this question is expanding, as referenced earlier with the number of folks who are of an age where this is going to be something that's happening in the next 10 years.

It's a very timely piece of legislation in that sense.

[Ted Falk, Conservative, Provencher, MB]

That's very good, thank you.

What is the risk of losing family farms in Canada if we don't remove the barrier of intergenerational transfers from a tax perspective?

[Andre Harpe]

I think the biggest issue we're looking at, as I alluded to in my remarks, is basically corporate farms. If we don't make it fair or equitable for you to pass your farm on to the children, all of a sudden you do get big farms, and all of a sudden you get real corporations running corporate farms.

When we talk about care for the environment and when we talk about climate change, a family farm looks after what we need to look after, because we want to pass that land on. What I would call a real corporate farm, I don't think they have the same incentive.

[Ted Falk, Conservative, Provencher, MB]

Mr. Chair, do I have a minute left?

[The Chair, Liberal, Wayne Easter]

You have a minute and a half.

[Ted Falk, Conservative, Provencher, MB]

Thank you.

I think you've identified one of the problems with the big corporate farms. They're looking at returns and not always necessarily being good stewards of the land. Not that they're all like that, and I don't want to lump them all into one sum, but family farmers know they need to protect the land and the resources available to them for future generations. I think they have their eye on that part of the equation much more so than a big corporation. They're looking to generate profits for multiple shareholders.

You indicated in your intervention that your retirement plan is your RRSP and the equity you have in your farm. When you're going to consider selling your farm to one of your daughters, you're going to be looking at what's going to maximize your retirement return. If you sell it to the neighbour, he's going to provide you with probably the same amount of money that your daughters would feel it would be worth, except you're going to end up paying a bigger tax bill if you sell it to your daughters, unless we can pass this important piece of legislation. Have I accurately identified that concern?

[Andre Harpe]

Yes, that's correct.

[Ted Falk, Conservative, Provencher, MB]

From what you're aware of in this legislation, do you see any hurdles that would prevent...a problem of a family farm transition?