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 Mercer

By: The Hon. Terry Mercer

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Parliament and the Supreme Court of Canada, Ottawa

Hon. Terry M. Mercer: Honourable senators, I would like to begin by acknowledging that I’m joining you from the ancestral and unceded territory of the Mi’kmaq people.

I rise today to speak to Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation).

I applaud the sponsor, Larry McGuire, the MP for Brandon-Souris, Manitoba, and Prince Edward Island Senator Diane Griffin for their good intentions and passionate promotion of this bill. But I fear expediency and unintended consequences may unravel those good intentions.

I fully support helping fishers and farmers to keep their businesses within their families, period. That intent of the bill I fully support, but fishing and farming are not the only businesses that would qualify. As noted by the Department of Finance officials, it would apply to any small business corporation that would extend the bill’s reach and its cost. The bill potentially creates a loophole with no real safeguards in place to ensure that it is only intended for genuine intergenerational transfers. That is what worries me.

Indeed, we might ask ourselves if there are any ways to better help Canadian fishers and farmers without exposing the tax system to major abuse.

Innovation, Science and Economic Development Canada’s report Key Small Business Statistics — 2020 defines SMEs — small to medium-sized enterprises — as a business establishment with 1 to 499 paid employees. More specifically, a small business has 1 to 99 paid employees, a medium-sized business has 100 to 499 paid employees and a large business has 500 or more paid employees.

The report goes on to say that as of December 2019, the Canadian economy totalled 1.23 million employer businesses.

I want you to listen to these statistics and what these businesses are. Of those, 1.2 million, or 97.9%, were small businesses; 22,905, or 1.9%, were medium-sized businesses; and 2,978, or 0.2%, were large businesses. As of 2019, small businesses employed 8.4 million individuals in Canada, or 68.8% of the total private labour force. By comparison, medium-sized businesses employed 2.4 million individuals, or 19.7%, and large businesses employed 1.4 million individuals, or 11.5%.

This bill would not just apply to fishers and farmers; it would apply to doctors, dentists, electricians, lawyers, real estate, construction, retail stores, accountants, insurance brokers and the list goes on and on.

Small businesses are vital to the Canadian economy, and I fully support helping them thrive. However, such a major financial change to our tax laws should be enacted by a government bill and not through private member’s legislation. It should be thoroughly reviewed to make sure its intentions are met.

The integrity of our tax system is such that provisions are put in place to prevent abuses in the system. I believe this bill could put its integrity in jeopardy. The sponsor of the bill has stated there is a safeguard in place: a five-year waiting period to ensure the transaction is legitimate. If there is a sale between a parent and a child, the five-year waiting period is meant to ensure that the transition is legitimate and the child would have to keep sole ownership of the business and not transfer it back to the parent, which is how the unfair tax advantage would be achieved. If shares are sold by the child within those five years, taxes would be applied. Is this five-year waiting period enough as a safeguard?

Honourable senators, there are options available for further safeguards that already exist in other jurisdictions.

In 2016, Quebec implemented changes to its Taxation Act aimed at facilitating the transfer of family businesses operating in the resource and manufacturing sectors to family members. One of the financial officials at the Agriculture and Forestry Committee said this about Bill C-208:

. . . a significant improvement would be to introduce conditions that would need to be met in order to test whether there has been a transfer of a business. For a precedent to those, one could look to Quebec’s rules, which have a similar intergenerational transfer rule except that they require involvement of the parent in the business before the transfer — significant involvement — a relinquishment of control of the business as part of the transfer and some involvement with the child in the business.

These safeguards, or something similar, are not in this bill.

Honourable senators, it was also noted during our last committee meeting that there was no one who would say they oppose this bill, except the Finance officials, of course. Why would they? Who would speak out against a bill that could potentially mean hundreds of millions of dollars in tax savings? That’s right, no one. So the efforts to level the playing field for fishers and farmers would be derailed by wealthier businesses that will take advantage of this. It would be a case of the rich getting richer.

In 2017, the Parliamentary Budget Officer released a cost estimate for a previous, yet similar, bill. The forgone tax revenue would have ranged from $163 million to $273 million in 2017, and between $178 million and $279 million in 2018. However, that report was four years ago. What that report will not tell you is that it cannot predict people’s behaviour in the future.

I’ve reviewed an interesting research report that was brought to my attention. The Influence of Tax Factors on Québec and Other Canadian SME Transfers is a research report published in December 2020 by the Institut de recherche sur les PME with the following people participating: Marc Duhamel, PhD, Department of finance and economics; Louise Cadieux, Département de Management, both of the School of Management, Université du Québec à Trois-Rivières; and François Brouard, Accounting and Taxation at the Sprott School of Business at Carleton University. Its results were fascinating. I would like to review some of these facts. The report is highly detailed, and I would encourage you to read it fully. On the economic contribution of the capital gains generated by SME transfers, the report states:

In Québec alone, the capital gains that would be generated by the fulfilment of all SME transfer intentions could reach the $15.7 billion mark over a period of five years (2017-2022). . . . At the same time, we note that SME transfers in the other Canadian provinces annually represent a little over $41 billion in capital gains over a period of five years . . . . Across Canada, the value of the anticipated capital gains from intended SME transfers corresponds to a little over $11.4 billion annually.

This is not a small budgetary item, honourable senators. The report goes on to say:

Our findings suggest that the Québec SME owner population that intends to transfer to family members between 2017 and 2022 could save $245.6 million to a little over $1.04 billion, if it were eligible for the same capital gains deduction as the one extended to Québec SME owners who are thinking about transferring their businesses to external successors. . . .

This bill treats family transfers the same as external transfers. The data is only for the province of Quebec and not the country. Again, it’s not a small budgetary amount, honourable senators, it’s $1 billion. How much will it be for the rest of the country?

We all care about the programs that taxes provide, so this potential hit to the tax base is a bit worrisome. Why are we pushing ahead with this bill instead of ensuring that we can effectively lower taxes on such transfers for farmers and fishers without costing the treasury? Why have we not examined how we can improve the tax system for all small business without shocking the budget?

Upon hearing the evidence from Finance officials that the bill may open the door for major tax avoidance, I asked that we hear from more witnesses. It had been my intention to review the aforementioned Quebec model, which would help mitigate some of the unintended consequences of this bill. I also tried to attach an observation to the bill, which was to simply recommend that a parliamentary committee review the bill’s consequences after one year and then report on it after the year with any recommendations. That seemed pretty straightforward to me and a reasonable thing to do. Unfortunately, neither of those things happened. There were some suggestions that the government, agencies or officials would be doing a review anyway, which I found odd. How do we know that they would do that?

One final comment I would like to offer is that I do not believe most people understand the major consequences resulting from the passage of this bill. Tax law is extremely complicated. It was certainly a learning experience for me. The bill may seem straightforward, but as they say, the devil is in the details. So, honourable senators, where do we stand? Do we want the rich to get richer, or do we want a proper system to help fishers and farmers without exposing the tax system to major abuse?

I am fully supportive of measures to level the playing field for fishers and farmers. Indeed, I would fully support a bill that does so. But I cannot support this bill if it creates a loophole that threatens the integrity of the system. I ask you to seriously consider some of these questions and concerns, and the consequences this bill would expose the tax system to, before you decide on how to vote. Thank you, honourable senators.

The Hon. the Speaker: Senator Mercer, Senator Loffreda has a question. Will you take a question?

Senator Mercer: Yes, if I have time.

Hon. Tony Loffreda: I had my hand up for Senator Cordy, but I thank you both for your compelling speeches.

No one wants tax loopholes. The problem with this bill was that, at the beginning, it would strip the earnings at capital gains rates. I agree it’s not a perfect bill, but do you agree with me — the intergenerational tax being charged is 48%, if the business is purchased by a Canadian company it is 26%, if it is purchased by a non-resident it’s 13%.

I’m afraid that if there is an amendment, this bill will not go forward. We have been waiting for so long to correct this injustice. You are talking about numbers over five years, Senator Mercer, and it is at a cost of $178 million to $300 million a year, but the bill could be amended. We could fix the budget bill eventually, and the CRA could make interpretations to the accounting community. There are ways of authorizing this bill, approving it and correcting it as we go along. I’ve always said that it’s never static, it’s dynamic.

Would you agree that it has taken far too long to correct these injustices, and now that we have the opportunity to do so, we should correct them, and make certain that there are no loopholes? It’s not about the wealthy. The average Canadian farmer was 55 in 2016. About 75% of small business owners are already intending to exit their businesses between 2018 and 2028. Some 50% of business owners wish for the succession of their business to a family member. To add to that, the CRA says that these proposals also require a taxpayer to provide the CRA an independent assessment of the subject shares’ fair market value and an affidavit signed by the parties.

Do you feel that the current tax rate is fair, and do you feel we should not adjust it now when we have the opportunity and come quickly back to amend this bill when we can and not — with the rumour of a fall election — kill it and maybe wait another three, four or five years? That is my worry.

Senator Mercer: No, I don’t think we should wait that long.

The Hon. the Speaker: I’m sorry, Senator Mercer, your time has expired.

Senator Mercer: Well, I enjoyed Senator Loffreda’s speech.

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