Bill C-208 “welcome news” for family businesses, expert says

Posted on July 01, 2021 | By Simon R. Smith | 0 Comments

Jennifer Dunn, Tax Partner, BDO Canada

 

A tax partner at a large Canadian accounting firm says new federal legislation will make it easier for Canadian farmers to keep their farm in the family.

Introduced by Manitoba Conservative MP Larry Maguire, Bill C-208 is an amendment to the Income Tax Act which is intended to correct a longstanding dilemma faced by those hoping to transfer ownership of their small business, family farm or fishing corporation when they retire: to sell the business to their children or an “arm’s-length” buyer.

The bill, which was passed June 29, has had a long history in Canadian parliament according to Jennifer Dunn, a tax partner at BDO Canada. Several BDO tax experts consulted on the bill.

“It’s about bringing fairness and equity from a taxation perspective to the transfer of a family farm corporation, fishing enterprise, or small family business,” Dunn said. “The goal of the bill is to level the playing field, giving families the exact same tax treatment when they transfer their businesses to their children as when they transfer them to an arm’s-length person.”

In effect, the bill nullifies a financial disadvantage experienced by those attempting to sell their business to their child. The disadvantage is caused by an anti-avoidance rule in section 84.1 of the Income Tax Act which bans a practice called surplus stripping, Dunn explained, which occurs when an individual shareholder accesses their corporation’s surplus in a manner that produces a capital gain rather than a dividend.

“Most taxpayers would prefer to pay tax on a capital gain as opposed to a dividend,” Dunn said. “Basically, this legislation will make the sale of a business to a child the exact same as if they were selling to an arms-length party.”

While the bill will be “welcome news” in the business community, Dunn said, the language is somewhat broad.

“The way this bill is written, the company owned by the child buying the parent’s company … has to be controlled by the child,” she said, adding that there is no requirement that the child is actually involved in the business or that the parent ceases their involvement.

Dunn said she anticipates that the department of finance will want to amend the bill’s language to limit transactions that may not be “bonafide intergenerational transfers.” Any business owner currently in the process of selling their business, she said, should be cautious and reach out to their professional advisor.

“Because it’s welcome news, perhaps transactions will be undertaken quickly after it receives royal assent but just be careful that it is a bonafide intergenerational transfer,” she said. •

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