Thank you, Mr. Chair and honourable members, for the invitation to share our thoughts with you today in advance of budget 2022.
As you said, my name is Am Lidder. I'm the senior vice president of tax at MNP, and I'm joined today by my colleague Kim Drever. As the largest professional services firm headquartered in Canada, we proudly serve over 280,000 clients, and we've worked side by side with Canadian businesses for over 60 years in 125 communities of all sizes across the country.
It's with the experience of our clients in mind that we provided the committee a copy of “Unleashing Canada's Potential”. In this document that was shared with you is a summary of policy considerations that we've developed by canvassing our national network of professionals.
Over the last two years, our partners have had hundreds of thousands of conversations with Canadians about their lives and businesses, and supported them as they navigated the impacts of the pandemic, as well as managed through wildfires, floods, labour challenges and supply chain disruptions. Whether it's a blueberry farm in the Fraser Valley, a flower shop in Brandon or a fabrication shop in Halifax, each of our clients has been impacted in some way.
Our submission provides several policy considerations along three key themes that we believe, when addressed, can bolster Canada's economic standing and ensure that we build a resilient and sustainable economy. These three themes are building Canadian confidence, fostering innovation and achieving Canadian excellence.
While there are many potential topics contained within those themes, our remarks today will focus on one specific challenge for Canadian farm, fishing and private businesses, which is making sure that family businesses stay family businesses.
Previously, a long-standing rule in the Income Tax Act treated intergenerational transfers of a business as a dividend, rather than a capital gain. Bill C-208 changed that rule to allow access to the lifetime capital gains exemption, and provided positive changes around the division of a family business among siblings. Although our time today focuses on the transition aspect of Bill C-208, we believe that the ability to divide a family business amongst siblings granted in the legislation is necessary and that it should be maintained.
Because of how our tax rules are currently structured, transitioning a farm, fishing or small business from a mother or father to their children or grandchildren has been punitive, compared to selling that same business to a third party. The introduction of Bill C-208 provided for the intergenerational transfer of certain family businesses to receive the same tax treatment as businesses sold to a third party. Bill C-208 represents a significant positive change to support family business succession in Canada.
Prior to this bill passing, when a business owner sold or transferred their shares of their business to either their adult child or grandchild, they were taxed at an average dividend rate of up to 46%. However, if that same business was instead sold to a non-family member, the seller would be taxed at the lower capital gains rate of up to 26% and they would be able to use their capital gains exemption to reduce their tax.
We believe families should not be disincentivized from selling their businesses within their family due to tax policy. Bill C-208 represents a good start to addressing the disadvantage families face.
On July 19, the Government of Canada suggested that amendments would be forthcoming in the fall of 2021. However, businesses have yet to see this draft legislation. In the press release, the Government of Canada laid out four potential hallmarks to define a bona fide succession, and we agree that the tax treatment outlined in Bill C-208 ought to be used in the process of a true business transition.
It's important to remember that no two family business transitions are the same, and overly prescriptive hallmarks have the potential to create different barriers that hinder the succession of family businesses. For example, in the sale of a business to a third party, the Government of Canada does not limit the involvement of the seller in the future activities of the business following the sale. However, the government has indicated that they would limit the level of ownership and involvement that a parent can maintain after the transfer. In our experience, it's common in the succession of many businesses for the seller to remain engaged for a transition period, though the length and nature of that transition period should be driven by what is best for the business and not mandated by tax law.
As the Government of Canada contemplates amendments, we would encourage intergenerational transfers to be broadened to include, for example, the sale of businesses between siblings. In addition, the capital gains treatment on the sale of shares should be maintained where the lifetime capital gains exemption is not available.
Also, Bill C-208 restricts the use of the capital gains exemption for capital-intensive businesses like farming or manufacturing. The taxable capital limit was introduced in 1989 and has not been adjusted nor kept pace with inflation.
We welcome any questions you might have related to what we have provided in our submission or presented today.
Thank you.