A day after the Department of Finance confirmed that changes to tax rules facilitating the intergenerational transfer of small businesses are now law, a House of Commons committee met Tuesday to sort out any remaining confusion around Bill C-208’s implementation.
The private member’s bill introduced by Conservative MP Larry Maguire received royal assent June 29 despite not being supported by the Liberal government. A day later, however, the Department of Finance issued a release saying it would delay the bill’s implementation until Jan. 1, 2022 over concerns that the bill creates an opportunity for tax avoidance “that undermines the equity of Canada’s tax system.”
On the eve of the House finance committee’s emergency meeting on Tuesday to review Finance’s intervention — Parliament had risen and MPs had left Ottawa last month — the department issued a release late Monday afternoon stating that Bill C-208’s changes are law and part of the Income Tax Act.
While the government “is committed to facilitating genuine intergenerational share transfers,” the release said, it’s “also committed to protecting the integrity of the tax system. As such, the government is clarifying that it does intend to bring forward amendments to the Income Tax Act that honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes that may have been created by Bill C-208.”
The main concern is “surplus stripping,” where dividends are converted to capital gains to take advantage of a lower tax rate without ownership of the business actually being transferred.
The government will introduce draft legislative amendments for consultation, with final proposals in another bill that would apply as of Nov. 1 or when the final draft legislation is published — whichever comes later.
A small business owner selling a business to a family member in the near term, relying on Bill C-208, would not be affected by retroactive amendments that might be enacted, said Trevor McGowan, a Department of Finance official, in a response to a question at the committee.
McGowan confirmed that Bill C-208 was law and that “any new amendments put forward by the government, which would need to be included in a bill and passed through Parliament, would not apply before Nov. 1, 2021.”
Liberal MP Rachel Bendayan, who’s also parliamentary secretary to Small Business Minister Mary Ng, emphasized the same point.
“I would like to unequivocally confirm on behalf of the government that any amendments to safeguard our tax policy or avoid artificial tax planning in connection with Bill C-208 would not be retroactive,” she said.
Kim Moody, CEO and director of Canadian tax advisory firm Moody’s Tax in Calgary, said in a LinkedIn post Monday that the department’s clarification was welcome after the “misleading” June 30 release.
“It is helpful to see the government’s intent regarding how they intend to introduce amendments and when they will apply … the later of either November 1, 2021 or the date of the publication of the final draft legislation,” he said.
The Canadian Federation of Independent Business (CFIB) also welcomed Finance’s clarification after what the small business lobby group called “a break with procedure.”
“Small business owners have been waiting for this change to the tax act for years. This bill is the culmination of years of work on the part of CFIB and small business owners in fighting for fairness for family-owned businesses,” a statement from the organization said.
“Nearly three-quarters (72%) of business owners intend to exit their business by 2028. With C-208, business owners are no longer penalized for selling their business to a family member.”
At the House finance committee on Tuesday, Parliament’s legal expert said the Liberal government waded into uncharted territory when it decided to delay enacting the tax rule changes.
Parliamentary law clerk Philippe Dufresne said the bill officially became law when it received royal assent last month. Finance’s earlier move to delay implementation to Jan. 1, 2022 on the grounds that there was no coming-into-force date written into the bill was a surprising move and one unseen in modern history, Dufresne told the committee.