moved that Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), be read the second time and referred to a committee.
Madam Speaker, it truly is a humbling moment to stand in this chamber and put one's name to legislation and ask one's colleagues to support it. As fate would have it, today marks the seventh anniversary of my representing Brandon—Souris since the by-election that took place on November 25, 2013.
Private members' bills give us the opportunity to set aside our political allegiances, to rise as parliamentarians and to champion the causes of issues whose time has come. In that spirit, I reached out to all the MPs in this House from other parties, to speak about this legislation back before the first reading. I want to specifically thank Guy Caron, who spearheaded this legislation in the last Parliament. Now it is up to us to pick up where he left off and pass it into law.
The essence of this bill is pretty straightforward. Bill C-208 would allow small businesses, farm families and family fishing corporations the same tax rate when selling their operations to a family member as they would if they sold it to a third party. Currently, when a person sells their small business to a family member, the difference between the sale price and the original purchase price is considered to be a dividend. However, if the business is sold to a non-family member, the sale is considered a capital gain. A capital gain is taxed at a much lower rate and allows the seller to use the lifetime capital gains exemption.
It is completely unacceptable that it is more financially advantageous for a parent to sell their farm or small business to an absolute stranger than it is to their own children. I want to give two specific examples this afternoon on how this legislation will help families transfer their operations when they decide to make that transition.
Imagine a bakery that a couple have owned for about 30 years. The couple running the bakery are now ready to retire and another bakery has reached out to indicate that they would like to purchase it from them. However, their daughter has worked with the couple throughout the years in that bakery as she has grown up and has indicated that she wants to take over the family business. Like a lot of small business owners and farmers, they could not afford to put large sums of money away into RRSPs and other saving vehicles, as any extra money that they had went into their own small business.
This couple would rely on the sale of the bakery to basically fund their retirement plans, so they call upon an accountant to start a conversation about different planning scenarios. Their accountant comes back to them, saying if they sold the bakery to the other company, rather than their daughter, they would have an effective tax rate of 10% after using their lifetime capital gains exemption. Their accountant also told them that if they sold the bakery to their daughter, she would be obligated to repay their loan with personal tax dollars, which is a significant penalty. Compared to selling their bakery to the other company, it would render the effective tax rate to be significantly higher. With that information in hand, they have a family huddle and discuss the options.
The couple is now seriously considering selling the business outside of the family as they do to want to put the burden of their tax obligation on their daughter. It would inhibit her ability to make a living and grow the business. On the sale of shares to the bakery, this couple should be indifferent to selling shares to their daughter or the other company. Their daughter should not be penalized for purchasing shares from her parents and should be able to fund the purchase with corporate funds, as she would if she were to purchase the business from an unrelated party.
Bill C-208 would allow the next generation to become business owners and to keep businesses locally owned. With this bill, Bill C-208, we can fix this injustice once and for all. Right now many small businesses are struggling. This pandemic has been one of the most disruptive times in our lifetime. Across our country, no community is immune from its impact. To those entrepreneurs who are listening to this speech tonight, I have their back. Anyone who has ever run their own business understands the massive responsibility and stress that comes with being one's own boss. They are risk takers and job creators. Small business owners make up the backbone of our economy.
From tradespeople to grocers, and everything in between, entrepreneurs are the pillars of our communities. It is not easy to start a business. Some people must take out massive loans just to get their doors open. They put everything on the line to make their operations a success. Hopefully, after many years of hard work, they slowly and surely pay off their debt, expand their business and create even more jobs in their own communities. They pour their hearts and souls into their businesses and, when they are ready to enjoy retirement, there would be no greater joy for them than to see what they built be transferred to their child or grandchild.
As a young entrepreneur, I was one of those who was able to carry on the legacy of my parents. In 1948, my mom and dad carved out a little slice of heaven and started our farm near Elgin, Manitoba. My brother and I are proud to be the sons of farmers.
In the words of Paul Harvey:
And on the 8th day, God looked down on his planned paradise and said, “I need a caretaker.” So God made a farmer. God said, “I need somebody willing to get up before dawn, milk cows, work all day in the fields, milk cows again, eat supper and then go to town and stay past midnight at a meeting of the school board.” So God made a farmer.
I learned a lot from my parents. There were times when they were incredibly tough. Sometimes commodity prices were in the basement. There were other times when equipment would break down just when it was needed the most. I know life is not always easy. It never has been, and it probably never will be.
However, the legislation we have before us today sends a strong message to all those family-run businesses that it will no longer be more financially advantageous to transfer a business or farm to a stranger than to their own children because of tax purposes.
The other example I want to give is of a farmer who is set to retire in the next couple of years and is reviewing succession options. The farmer wants his son to take over; however, he wants fair market value for his farm in order to fund his retirement, as well.
If a third party were to ask to purchase the shares of the farming company, the purchaser would be able to purchase those shares through a corporation. By selling his farm to this third party, the farmer could use his farm capital gain exemption on the sale, resulting in a 13.39% effective tax rate.
However, if the farmer sold his farm to his son, that sale would be recorded as a dividend, rather than a capital gain, and the farmer would pay 47.4% in tax. That is over 34% more in tax. I think we can all agree that it is completely unfair for the tax rate to be significantly higher when the farmer sells his operation to his son rather than to a third party who, in many cases, is a complete stranger.
Bill C-208 sends a message of hope to young farmers who want to carry on what their parents started. There is something special about being connected to the land and reaping what one sows, as is true for any small business. It is an attachment.
In Manitoba and other provinces, there are Century Farm Awards to celebrate farm families who have maintained continuous production for 100 years or more. Many of these in the Prairies are now well over 125 years. I have attended many centennial farm celebration ceremonies, and the faces of the family members involved show how important this milestone is for them.
Farm families face unique pressures in succeeding their operations, including the increasing cost of land, the average age of farm operators and the capital requirements for those entering the industry. The passage of this bill would eliminate the unfair tax rates that make it difficult to keep businesses under family ownership.
With that, I ask my colleagues to reach out to their constituents and ask them if they should support this legislation. Ask those constituents if they think it is unfair that selling a business to their children should be more expensive than selling to a stranger.
This legislation would impact every single constituency in Canada. From a family run farm in Cumberland—Colchester to a family run business in Winnipeg North or a fishing enterprise in Miramichi, people are looking to their members of Parliament to support this bill.
With that, I ask all members to join me in passing Bill C-208. By working together, we can support our entrepreneurs, small businesses, farmers and fishers who make up the backbone of our economy. Let us roll up our sleeves and get this job done.