Income Tax Act Bill to Amend--Third Reading--Debate
Honourable senators, I rise on debate on private member’s Bill C-208, which aims to facilitate the intergenerational transfer of family businesses between family members and provide better retirements for the parents and grandparents who operated them.
While it goes without saying that the contribution of Canada’s fishers and farmers to the nation’s livelihood and food security is indispensable, their value in providing sustenance to us and other countries, especially during the pandemic, has been incalculable. Supporting those individuals is crucial to the renewal and future of our nation’s farming and fishing communities.
However, while the goals of Bill C-208 are laudable, there are also omissions in this bill that can and will lead to unintended consequences. Those include the avoidance of taxes; a reduction in tax revenues to the government; and providing unintended advantages to wealthier Canadians, be they doctors, lawyers, dentists, accountants, construction businesses and even family-owned plumbing businesses.
I believe there is a need here for sober second thought to ensure that, in our efforts to see family farms and fishers thrive and to ensure stable retirements for those who built those businesses, we don’t end up with a bill that leads to something unintended and unspoken of during second reading debate. Simply put, by reducing the tax payable on the sale of a parent-controlled company, this bill creates a loophole that could benefit individuals it was not intended to benefit.
While fishers, farmers, small businesses, politicians and many others have been asking for this law for some time, perhaps it might be useful to quickly review what is already in place, as that has ramifications for the bill.
Canada’s Income Tax Act currently has a number of rules that specifically help farmers and fishers accumulate capital for retirement and facilitate the intergenerational transfer of property used in fishing or farming businesses. For example, through the lifetime capital gains exemption, an individual may shelter from tax up to $1 million of capital gains realized on the disposition of eligible farm and fishing property. The exemption can be doubled to $2 million if both farmer or fisher and their spouse qualify for the exemption.
Farmers and fishers are also entitled to transfer qualifying farming or fishing businesses on a tax-deferred basis to their children, thereby avoiding immediate tax on capital gains and facilitating the intergenerational transfer. A transfer may be structured so as to maximize an individual’s lifetime capital gains exemption limit while also minimizing the tax implications of the transfer through the use of the intergenerational rollover.
Finally, farmers and fishers are also entitled to a capital gains tax deferral through a 10-year capital gains reserve where the proceeds of disposition have not been fully received and the property has been transferred to a child.
We are familiar with the positive measures raised in Bill C-208, but we also need to keep in mind all the potential negative consequences of it passing.
First, there are good reasons for the existence of corporate anti-avoidance rules that the bill proposes to amend. For example, rules currently preclude companies from moving shares around within a non-arm’s-length group in order to convert a taxable dividend into a capital gain. Taxable dividends are taxed at a significantly higher rate than capital gains, hence the reason why an owner would want to do this. Bill C-208 would allow an exception to the rule by allowing a form of internal transfer among siblings purchasing their parents’ or grandparents’ business.
This will effectively lead to a lower tax rate upon sale, providing a wealthier retirement nest egg for their parents. But according to tax officials who testified at our own Committee on Agriculture and Forestry last week, this bill lacks the appropriate safeguards that ensure that a real intergenerational transfer takes place. For example, there is nothing in this bill — nothing at all — that requires the parent to cease their involvement in the business they have just sold to their offspring, nor does it require the offspring to take a role in running it. Without such a safeguard, the parents can sell the shares to a holding company set up by the children, avoid taxes on this sale and then buy the shares back at a later date. Married couples who do this will save taxes payable up to $1.8 million over their lifetimes if they decide to use their capital gains exemptions upon sale.
One has to ask oneself whether the goal of the bill is being achieved if this does not require the child to be the operator of the business.
Moreover, as noted earlier, these measures apply to all businesses, not just farms and family fishing companies; it would apply to a securities-trading business just as simply as it does to a farm.
Finally, there are serious tax-avoidance opportunities that will become a significant cost to the tax framework that the government has been carefully planning in the 2021 budget. In short, this would provide considerable benefits to some taxpayers in the form of a tax-exempt distribution of corporate surpluses without adequately guaranteeing that a true intergenerational business transfer has occurred.
Given these complexities, it is essential not to undertake any modification without a deliberate and in-depth reflection of what it would represent in practical terms and to avoid creating loopholes that would disproportionately benefit the rich. That means that changes in these sections of the law must be done with great caution lest they create unintended consequences, as I’ve just mentioned.
In summary, there are four good reasons why this bill needs to be amended.
First, the bill is regressive. The bill would open the door to new tax-avoidance opportunities that would unfairly benefit wealthy individuals instead of hard-working Canadians, and in the end, it would provide up to $900,000 tax-free wealth to wealthy taxpayers and up to $1.8 million to couples.
Second, the bill is not targeted. The bill does not apply solely to farmers and fishing corporations. It applies to all Canadian-controlled private corporations, or CCPCs, creating widespread tax planning opportunities. You may recall that economist Kevin Milligan has found that CCPCs are used predominantly by higher income individuals. Given the value of transactions that would benefit from this, we can expect the incorporated higher net worth individuals to take advantage of these provisions.
Third, the bill creates serious opportunities for tax avoidance. This bill creates major opportunities for illegitimate business transfers to be used to reap tax benefits. The bill does not require the parent to cease controlling the business, neither does it require the child to be involved in the business. This would allow parents to sell the shares to a child’s holding company and then, as I say, buy the child’s company back.
Fourth, the bill becomes a substantial fiscal cost to the Government of Canada. The Parliamentary Budget Officer has spoken of earlier contributions and estimated the cost at half a billion dollars four years ago. Combined with behavioural responses as more tax firms offer this product, I can only assume that this number will be much exceeded should this bill be adopted.
Thank you, colleagues. I would ask you to consider these amendments and close these loopholes now.