A Manitoba Conservative MP’s bill to standardize the tax treatment for sales of farms and other small businesses has cleared the House of Commons and is en route to the Senate.
Brandon-Souris MP Larry Maguire’s Bill C-208, which was introduced for first reading in February last year, passed third reading in the Commons on Wednesday.
C-208 proposes to amend the federal Income Tax Act to exclude sales of farms and other small businesses to adult children or grandchildren from current anti-avoidance rules.
The bill passed 199-128 on third reading, with opposition mostly from members of the Liberal caucus, Maguire said. The Senate next sits on May 25.
Today, Maguire said, “when a person sells their small business or farm to a family member, the difference between the sale price and the original purchase price is considered a dividend.”
But if the business instead goes to a non-family member, the sale is deemed a capital gain, which is taxed at a lower rate and allows sellers to use their lifetime capital gains exemption, he said.
“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,” Maguire said at second reading in November last year.
The bill also picked up endorsement from Bloc Quebecois and NDP MPs. British Columbia MP Peter Julian spoke in favour of the bill in November, saying that to end “a very perverse aspect of our tax system and facilitating, in a sense, small businesses under $1 million to be passed from one generation to the next without penalties being incurred, makes a big difference for family-owned business.”
C-208 also picked up endorsements from the Keystone Agricultural Producers, Insurance Brokers Association of Canada, Canadian Federation of Agriculture, Grain Growers of Canada, Canadian Canola Growers Association and Canadian Federation of Independent Business, Maguire noted.
Agricultural Producers Association of Saskatchewan (APAS) on Thursday also hailed the bill’s passage in the Commons. APAS president Todd Lewis described it as “an opportunity to address this longstanding inequity that has negatively impacted the transition plans of family farms in Canada.”
However, during debate on the bill in November, Ontario Liberal MP Tony Van Bynen cautioned that Maguire’s bill “seeks to amend two of the Income Tax Act’s most important and complex anti-avoidance rules.”
Those rules, he said, are meant to apply when an individual sells shares of a corporation to another corporation that is linked to an individual, such as a family member.
When shares of a Canadian corporation are sold to such a “linked” corporation, the rules deem that in certain circumstances, the seller has received a taxable dividend from the linked corporation, rather than a capital gain, Van Bynen said.
The rule, he said, is meant to ensure taxpayers “cannot use linked corporations to, in effect, remove earnings from their corporations, using a sale as a basis to do so.”
Quebec Conservative MP Richard Lehoux, in response, said Maguire’s bill “provides that the family member purchasing the business must keep their shares for at least five years to avoid the penalty.”
That requirement, he said, “will thwart attempts to exploit the system” for purposes of fraud or tax evasion.
Van Bynen said there’s already “nothing in the (Income Tax Act) stopping a parent from selling the shares of a family business directly to their child or grandchild on a tax-free basis using the lifetime capital gains exemption, which currently shelters up to $1 million in capital gains on qualified farm and fishing properties.”
The issues to be addressed by C-208, he said, arise only in “multi-tier corporate structures, where one corporation owns a second corporation” and the proposed changes to “could open the door to new tax-avoidance opportunities.”
C-208’s amendments, he said, would also affect section 55 of the act, which currently “generally applies to corporations that seek to inappropriately reduce capital gains by paying excessive tax-free dividends between corporations, which the act considers to be a capital gain.” — Glacier FarmMedia NetworkTagged C-208, capital gain, Commons, dividend, farm sale, farm transfer, income tax, Larry Maguire, Senate, succession