Third reading of Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation)—Senator Dalphond

By: The Hon. Pierre Dalphond

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Hon. Pierre J. Dalphond: Honourable senators, let me start by clearly stating that I share the comments so well expressed by Senator Woo last Thursday in opposition to the bill. I won’t repeat what he said, but instead I will emphasize a few points that I feel are still missing in this debate.

First, Bill C-208 will not apply to all transfers of farming or fishing businesses or other small businesses. Indeed, this bill aims to create an exception to a tax avoidance rule that applies only to a very specific scenario: The family business is incorporated and not owned directly by the parent or the parents who run it. The seller is selling the shares of that incorporated business and not the assets. The buyer is a corporation and not an individual, and the buying corporation is controlled by a child or grandchild of the seller. These are the sole cases that are contemplated by the bill.

If the sale of the farming or fishing business is done by a non‑incorporated owner, the tax treatment will always be the same whether it is sold to a child, grandchild or third party. If the business is incorporated and the sale of the shares is made directly to a non-incorporated child, grandchild or unrelated third party, the tax treatment will also be exactly the same.

According to Statistics Canada’s 2016 Census of Agriculture, barely 25% of family farms were incorporated. Twenty years before that, it was 12%. In 2016, that corresponded to about 48,600 incorporated farms across Canada. Senator Woo has explained what it represents to the whole picture of all the small businesses. It is only the tip of the iceberg; less than 3% of all small businesses targeted by that bill.

Second, among the owners of unincorporated farming businesses planning to retire, those wishing to sell to their children or grandchildren make up about one third.

This issue of transfer of family-run businesses has been the subject of a comprehensive and interesting report published in 2020 by the Institut de recherche sur les PME at the Université du Québec at Trois-Rivières, to which my colleague Senator Mercer referred briefly.

These professors weren’t called to appear before the Standing Senate Committee on Agriculture and Forestry, despite how relevant their work was to our study.

As a result of various studies, analyses and interviews, the professors’ report indicates that 70% of family business owners wanted to sell to third parties and not to their children or grandchildren for all kinds of reasons not necessarily related to taxation.

Far be it from me to suggest that the tax aspect played no role in their decision, but once again, we have to be careful. Indeed, the professors found that the vast majority of family businesses sold result in a capital gain of about $100,000 — not millions of dollars, $100,000. This means that the tax impact of the scenario I just described is between $0 and $53,000, depending on the seller’s tax rate.

None of these figures were mentioned at the Standing Senate Committee on Agriculture and Forestry. In other words, in the majority of family businesses, even when incorporated, the decision to sell to a third party rather than to a family member represents a loss to the seller that can range from $0 to a maximum of $53,000. After consulting statistics from Revenue Canada and census data and conducting interviews, the professors revealed in their report that, on average, the loss would be around $29,000. Can we honestly say that $29,000 is enough to jeopardize these sellers’ retirement savings? I admit that I’d rather have that $29,000 than not have it, but it’s a bit much to claim that that alone is compromising family successions and retirement savings.

Third, as Senator Woo mentioned last Thursday, farming and fishing businesses would represent only 3% of the small businesses that could benefit from the bill if adopted. In other words, the bill is not targeted at the transfers of small family-run farming and fishing corporations located in the countryside and in remote communities, but rather at small family businesses located everywhere in Canada and mainly in cities. For example, in a brief from the Insurance Brokers Association of Canada in support of this bill, the association stated that 25% of insurance brokers in Quebec and Ontario are family-owned small businesses. These types of businesses, which will be predominantly making news on the removal of the tax avoidance rules proposed, are the ones that would take advantage of the removal of the tax avoidance rules proposed in Bill C-208.

Fourth, in support of a speedy passage of this bill, we have heard on numerous occasions that this bill is in its fourth iteration and is widely supported by all parties in the House of Commons. This assertion calls for several important caveats.

Colleagues, the first bill of this kind was introduced on March 26, 2015, by NDP MP Francine Raynault. It never made it past second reading in the House of Commons, and more importantly, it targeted family farms and fishing corporations only, not all small businesses.

The second bill was introduced by Liberal MP Emmanuel Dubourg on June 11, 2015. The bill never made it past its introduction and first reading in the House of Commons. Noticeably, the bill contained a long preamble on its intent and required the purchaser to keep control of the purchased business for only 24 months.

The third bill was introduced on May 19, 2016, by NDP MP Guy Caron. It did not have a preamble that would guide the tax authorities and the tax court in interpreting the real intent of Parliament. This bill was defeated at second reading in the House of Commons with the entire Liberal caucus and one independent MP voting against it.

This brings us to Bill C-208, which is identical to the one introduced and defeated in 2016. It was adopted at second reading in the House of Commons by a vote of 178 yeas against 146 nays, which included 145 Liberal MPs and 1 independent.

At third reading, on May 12, 2021, just a month ago, more or less, the bill was adopted by a vote of 199 yeas against 128 nays, including 127 Liberal MPs, the full cabinet and 1 independent MP.

Nays from the cabinet members came despite the Prime Minister’s mandate letters to the Minister of Finance and Minister of Agriculture and Agri-Food asking them to come forward with a solution to address the tax inequity to which Senator Loffreda referred, especially for those having substantial assets of over $1 million and $2 million under the scenario that I described earlier.

As the Minister of Agriculture explained at the Congrès annuel de la Fédération de la relève agricole du Québec, held on March 5, 2021, the government is committed to addressing the inequity under the scenario described at the beginning of my speech, but is opposed to Bill C-208 because it is not properly designed.

What are these flaws in the design?

Colleagues, if you operate your fishing or farming business on your own, you file a tax return every year which includes all the income you made from the farming or fishing business, from which you deduct all the expenses, to obtain the net income that is taxable that year according to your taxation level, and that could vary from zero to 53%.

But if you set up a corporation to operate that business, the income belongs to the corporation. The corporation will use the net income to pay you a salary or a mix of salary and dividends, which incidentally, for dividends, would be taxed at a lower rate than salary. The corporations also have the option to keep the surplus money in its capital in its bank account — that’s why we call it the “surplus money.” When retirement rolls around, if the incorporated owner wants to sell shares to a third party, the sale price will not be based on the amount of cash in the bank account because the third party will agree to pay a price reflecting the true assets of the company, because a rational buyer does not borrow money from the bank to buy money from the seller; that makes no sense. Thus, prior to the transaction, the seller will make sure that the corporation redeems some of his shares or will pay him a dividend to cash out the accumulated surplus at the bank. That money received will be taxed as it would have had the money been taken out earlier. So you have deferred the tax, but you will pay the tax.

But if you have a corporate entity which was used and you are selling to a friendly buyer, then you could organize it to cash that money tax free as making it a capital deemed. Butterfly transactions are sophisticated things that I used to do as a corporate lawyer before I was a judge.

These are the types of things that are possible to do, but you transfer what is taxable in tax-free money. This tax avoidance rule was adopted to avoid that type of thing because we know a third party will not pay cash. But a friendly buyer, such as your son or grandson, might be ready to do it and will give you a promissory note and then will use the money from the company to pay you back the promissory note and give you the $1 million or whatever it was at the bank tax free. That’s what the rule we want to remove today is doing and that’s why it was adopted.

Before we do that, we should be careful. This is a budgetary measure and it should be left to the government, quite frankly.

Lastly, I want to talk about another of the bill’s failings, which is that it doesn’t harmonize with the Quebec system. As various experts told the committee, the only other government in Canada that has passed legislation to address tax inequality is Quebec, which introduced a measure in its 2015 budget that came into force on March 17, 2016. Nobody was taken by surprise. Revenu Québec had time to prepare interpretation bulletins, create forms and set up an adapted system.

When it was announced in 2015, the measure addressed only shares of the capital stock of family farm corporations, family fishing corporations and small businesses in the resource and manufacturing sectors.

In response to criticism, it was announced in Budget 2016 that eligibility for this measure would be expanded to all sectors of the economy. Quebec’s current system includes seven specific requirements that do not appear anywhere in Bill C-208. If we pass this bill, we’ll have a non-harmonized system that is more vulnerable to abuse than Quebec’s system. As the Institut de recherche sur les PME professors wrote in the report I referred to earlier, and as some Quebec tax experts have also said, harmonization would be ideal.

Failure to harmonize will cause problems for Quebec taxpayers and for Revenu Québec, which will have to explain that a transaction doesn’t meet Quebec’s requirements and will be rejected even though it meets federal requirements.

Instead of working toward harmonization, this bill will pressure the Government of Quebec to change its tax policy. That flies in the face of the principles of cooperative federalism.

The lack of proper safeguards as they exist in the Quebec framework is made more concerning by the fact that Bill C-208 will come into force immediately. In other words, there is no transition period contemplated to allow the Canada Revenue Agency to adapt to this new reality, to issue any forms needed or to train its employees.

In closing, while I believe that the Senate will have a fair and transparent system for dealing with House of Commons private members’ bills, I also think the Senate should keep the same high standards in reviewing those bills as it does with all government bills, especially because we are talking here about a budgetary measure. With Bill C-208, the high standards that Canadians should expect of the Senate have not been met, in my opinion. At a minimum, we should amend this bill for that reason. In the absence of a reasonable amendment, I suggest we defeat the bill.

Thank you. Meegwetch.

Some Hon. Senators: Hear, hear.

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