Taxpayers looking to use Bill C-208 to engage in aggressive tax planning may find their transactions challenged by the Canada Revenue Agency (CRA) under anti-avoidance legislation — even before the government introduces legislative amendments to the bill.
“The biggest risk is the general anti-avoidance rule,” said Aasim Hirji, director of Canadian tax law with Moody’s Tax in Calgary, speaking on a TaxBreaks podcast episode posted July 20. “[The Department of] Finance has made it quite clear that they have a problem with [Bill C-208] — they’ve pointed out the issues they have with it,” suggesting that the bill could provide opportunities for tax avoidance.
The general anti-avoidance rule, or GAAR, is a section of the Income Tax Act that allows the CRA to challenge a transaction that it considers abusive.
According to a BDO Canada blog post, “[Bill C-208] provides an opportunity for genuine intergenerational transfers of shares of small businesses or family farm and fishing corporations until at least Nov. 1, 2021.” The government will introduce legislative amendments that won’t take effect before that date.
But the consequences of using Bill C-208 for other tax planning purposes are unclear, the BDO post noted, “as these types of transactions are not consistent with the intent of Bill C-208.”
“Finance has advised that [their] amendments will not be effective prior to Nov. 1 [or a later date],” wrote Jessica Fabbro, a partner with Dentons Canada LLP in Edmonton, in an emailed statement to Investment Executive. “As such, business owners are now able to utilize the provisions of Bill C-208 as originally passed without being overly concerned about amendments prior to Nov. 1.”
Bill C-208 was a private member’s bill meant to facilitate “genuine” intergenerational transfers of small businesses, farms and fishing corporations. It was enacted on June 29, even though it did not have the support of the government, which was concerned that the bill created opportunities for tax avoidance.
The following day, the Department of Finance issued a release indicating that it would delay the implementation of the bill until Jan. 1, but subsequently “replaced” that release with another on July 19, where Minister of Finance Chrystia Freeland affirmed Bill C-208 was indeed law. “[We] regret recent uncertainty that we have caused,” Freeland said in the release.
The release also stated that the government would introduce legislative amendments on or after Nov. 1 to “honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes” — such as surplus stripping — “that may have been created by Bill C-208.”
Surplus stripping refers to transactions that allow for dividends to be converted to capital gains to take advantage of the lower tax rate, without a genuine transfer of a business taking place. In 2017, as part of a broader proposed set of changes to the taxation of small businesses, Finance announced it intended to curb surplus stripping but retreated after blowback from the small business sector and other stakeholders.
In the July 19 release, the government said the amendments to Bill C-208 would address the requirement to transfer legal and factual control of the business; the level of ownership the business owner could maintain after transfer; the requirement and timeline of transition of the business to the next generation; and the degree of involvement of the next generation in the business after the transfer.
In a July 5 TaxBreaks podcast episode, Hirji said that, as written, Bill C-208 contained relatively few safeguards against surplus stripping: “You can surplus strip without a genuine intergenerational transfer, it can be completely artificial, and you can remove cash from your company tax free.”
Kim Moody, CEO and director of Canadian tax advisory with Moody’s Tax, suggested in the July 20 episode that Finance’s concerns about Bill C-208 creating loopholes were justified.
“Do I think it’s open season on surplus stripping [after Bill C-208]? One might argue that it is,” said Moody. “Do I think our firm is going to take the position that it’s open season? No, because I think if you do that, I think you invite trouble.”