Canadian small businesses are in the lurch after the federal government announced it intends to defer the application date of a new law facilitating the intergenerational transfer of small businesses, tax experts say.
The government announced on June 30 that it would delay implementation of Bill C-208 until Jan. 1, 2022 over concerns that the bill creates an opportunity for tax avoidance “that undermines the equity of Canada’s tax system.” In the meantime, the Department of Finance could significantly amend the law — or scrap it entirely.
Bill C-208 received royal assent June 29, despite not being supported by the government. Laws generally come into force the day they receive royal assent.
“[The government] is putting business owners in complete limbo [by] not planning to resolve it until next year,” said Dan Kelly, president of the Canadian Federation of Independent Business. “I see that as a fairly insincere attempt to roll back the whole thing.”
The implementation delay “is a strong signal that the government will amend or repeal the legislation,” wrote Kim Moody, CEO and director of Canadian tax advisory with Moody’s Tax in Calgary, in a post on LinkedIn.
Bill C-208, a private member’s bill introduced by Conservative MP Larry Maguire last year, attempts to address a longstanding issue in the Income Tax Act: selling a business, family farm or fishing corporation to a family member, such as a child or grandchild, may result in a significantly higher tax bill for the business owner relative to the sale of that same business to a third party. The issue arises as a result of the tax-avoidance provisions in the Income Tax Act.
Three previous private members bills that tried to address the tax treatment of intergenerational transfers, including one introduced by a Liberal MP, failed. Bill C-208 defied the odds and was passed by the House of Commons in May and the Senate in June.
“The [passage of the] bill is in itself a significant accomplishment,” said Barry Pascal, chairman of the Conference for Advanced Life Underwriting. Nevertheless, Pascal said he isn’t surprised the Department of Finance has concerns about the legislation and may be considering changes.
CALU recognizes “that Finance Canada had concerns that Bill C-208 leaves the door open for aggressive tax avoidance in some situations and that the proposed legislation had other imperfections,” Pascal said.
CALU made submissions to Finance in 2017 and 2018 on how legislation could be drafted “to meet the twin goals of allowing for bona fide transfers while minimizing exposure to tax avoidance transactions,” said Kevin Wark, tax advisor to CALU. “Our intent would be to continue to be a resource to Finance assuming they are looking at possible modifications to Bill C-208.”
In the meantime, the government’s announcement “does create uncertainty,” for business owners, Wark said, particularly because a fall election would prevent Parliament from sitting much, if it all, during the rest of the year.
Kelly said he takes no issue with the Department of Finance wanting “to put some rules around this to make sure that they protect the integrity of the tax system,” but argued that should have been done while the bill was making its way through Parliament. “This [delay] seems like an attempt to just kick the can forward hoping that everyone will forget that Parliament has passed a piece of legislation — and that it’ll get lost after a [possible] election campaign this fall.”
In the meantime, small-business owners contemplating the sale of their businesses will bear the cost of the uncertainty, Kelly argued: “The shocking part of this is that there are family business transfers that are happening in real time, right now, and [the government’s deferral] can have major implications [on the transaction].”
Pascal advised caution.
“We really feel strongly that a business owner should consult their professional advisors regarding any sale to a family member until this legislative situation is clarified,” he said.