Mr. Speaker, I thank the member for Brandon—Souris for bringing forward this bill. I know that private members' business can generate some good bills from throughout the House. A lot of people do not fully appreciate the amount of work that goes into private members' business, which one only knows if one has gone down that road. Just for taking the time to go through the process to bring this piece of legislation forward, and all the work that went into it, the member deserve a lot of credit.
I am pleased to take part in the debate today over this private member's bill, Bill C-208, which aims to facilitate the transfer of family businesses between family members. This is an admirable goal. Indeed, our government recognizes this important issue, as evidenced by the mandate given by the Prime Minister to the Minister of Finance and the Minister of Agriculture and Agri-Food to work together on tax measures to facilitate the intergenerational transfer of farms.
Ensuring the sustainability of small businesses, family farms and fishing corporations is essential to our economy and to the communities these businesses serve. This has been underscored by their crucial role in supporting families and communities as we continue to fight against COVID-19.
Our government understands that this is a fact. From the onset of the pandemic, through Canada's COVID-19 economic response plan, we have introduced a range of supports for small business owners to help bridge them to the other side. Simply put, we have their backs, and this extends to helping family businesses thrive for generations to come.
Encouraging the sale of businesses to family members often means those businesses will remain in and continue to benefit their communities, as well as their families, who have fought hard, sacrificed and, through pure determination and entrepreneurial spirit, succeeded. It is with this spirit in mind that Bill C-208 is to bear full and careful consideration.
Bill C-208 seeks to amend two of the Income Tax Act's most important and complex anti-avoidance rules. These rules deal with intercorporate dividends, share sales and circumstances in which the lifetime capital gains exemption is claimed. Any relieving changes to these sections of the act must be done cautiously and follow rigorous study and debate to avoid the unintentional creation of loopholes that would disproportionately benefit the wealthy, instead of protecting the middle class and those who are struggling to join it.
Section 84.1 of the act, in particular, is in place to apply anti-avoidance rules when, as appropriate, an individual sells shares of one corporation to another corporation that is linked to the individual, such as one of a family member. When the individual sells shares of a Canadian corporation to a linked corporation, section 84.1 of the act deems, in certain circumstances, that the individual has received a taxable dividend from the linked corporation rather than the capital gain.
This prevents the individual from realizing the proceeds from the sale on the tax-free basis using the lifetime capital gains exemption. This rule is meant to ensure that taxpayers cannot use linked corporations to, in effect, remove earnings from their corporations using a contract sale. Without this rule, such sales between related parties could be used to convert what should be dividends of an individual shareholder into capital gains that are tax-free under the lifetime capital gains exemption.
Bill C-208 proposes narrowing the scope of section 84.1 by removing the sale of certain shares of small businesses, family farms or fishing corporations from its application when being sold by an individual to another corporation that is owned by their adult child or grandchild. This change would allow the owner-operator of a family business to convert the dividends of the corporation into tax-free capital gains.
In order to better illustrate how this would work, I will use an example. Let us say Darryl and Emily own a potato farm in P.E.I., which has grown to be a major regional supplier. After decades of hard work, they are now planning their retirement and want to pass down their business to their two adult children, both of whom already own successful small businesses in the community.
By applying the proposed amendments in Bill C-208, Darryl and Emily would sell non-voting preferred shares from their farm corporation to the two corporations controlled by their children. In doing this, they could claim tax-free treatment of the resulting capital gain from the sale under the lifetime capital gains exemption in a manner that allows the sale to be financed by the sold corporation's own assets without relinquishing control of the farm corporation.
Darryl and Emily could then use this planning to convert their annual dividend income into tax-free capital gains as often as they want, up to an amount equal to their lifetime capital gains limit. In this case, each parent could reduce his or her income tax by up to about $45,000 for each $100,000 of business profits distributed.
It is important to note that there is currently nothing in the act to stop a parent from selling their shares of their family business directly to their child or grandchild on a tax-free basis by using the lifetime capital gains exemption, which currently shelters up to $1 million in capital gains on qualified farm and fishing properties.
The issues sought to be addressed by Bill C-208 arise only in multi-tier corporate structures in which one corporation owns a second corporation. Adopting the proposed changes to section 84.1 could open the door to new tax avoidance opportunities. This would unfairly benefit wealthy individuals instead of the middle class.
Bill C-208 also proposes amendments to section 55 of the act, which generally applies to corporations that are seeking to inappropriately reduce their capital gains by paying excessive tax-free dividends between corporations, which the act considers to be a capital gain.