In a decision that took many in the business community by surprise, the Department of Finance Canada has announced that Bill C-208, which amends the Income Tax Act, will not come into force immediately, even though it received Royal Assent on June 29.
This bill is very consequential not only to Canadian entrepreneurs, but also to many brokerage firm owners, because it eliminates the tax penalties for intergenerational transfers of family businesses.
The federal government says that the bill that was passed, adopted and assented to does not contain an effective date. It is now proposing that it take effect on January 1, 2022, the beginning of the next taxation year, but through another bill. The Finance Department says it is committed to facilitating intergenerational stock transfers, but also to preventing tax avoidance “that undermines the equity of Canada’s tax system.”
Many questions
Naturally, the federal government’s decision raises many questions, given the parliamentary precedent set by this announcement. EY reviewed the implications in a tax note published on July 12.
The EY partners who wrote the review say that one thing seems certain: The government is adamant that some of the measures in the bill open the door to tax avoidance. EY points out that departmental officials have raised numerous concerns on this subject at various House of Commons committee hearings. Therefore, the Department probably wishes to amend the bill to avert this scenario.
The announcement certainly creates much uncertainty, EY argues. The partners ask three main questions.
First, they wonder whether the Canada Revenue Agency will challenge taxpayers who undertake transactions that may not represent bona fide intergenerational transfers in order to remove surplus from their corporations in a manner that appears to comply with the new rules in their current form.
Second, how will taxpayers who are executing genuine intergenerational transfers in the near term be reassured that their transactions will not violate the rules, knowing that the Department of Finance intends to introduce changes, but not knowing the details of those changes?
Third, is it legally possible for the government to delay the application date of legislation that presumably was already in force when it received Royal Assent? Is it enough for the Department of Finance to announce by press release its intention to do so? “Will the government then enact transitional rules allowing genuine intergenerational transfers made prior to 1 January 2022?” the EY partners add.
The accounting also wondered what will happen if it is not legally possible to delay the application date of the bill. “Will the government’s planned changes to the rules have retroactive effect such that they could apply to transactions completed after the time Bill C-208 received Royal Assent but before the enactment of the government’s amendments?” the EY partners ask.
The Future of the bill
The EY partners also argue that in the absence of existing rules facilitating intergenerational transfers, Parliament may have been motivated to pass Bill C-208 despite its perceived imperfections (in the eyes of the government and many in the tax community). Especially in the context of a potential dissolution of Parliament and a general election call.
Although it represents progress, this new legislation may not survive in its current form, EY partners warn. “It remains to be seen if and how the rules will be amended to prevent tax avoidance while promoting tax-efficient transfers of family businesses to the next generation without being so restrictive as to limit their practical application to Canadian taxpayers,” they conclude.
Reactions: CFIB angry...
"Outrageous” is how the Canadian Federation of Independent Business (CFIB) describes the federal government's move following the passage of Bill C-208. CFIB questions why the Department of Finance is deliberately breaking with Canadian parliamentary tradition and rules by not immediately applying the new law passed by Parliament.
The Canadian business lobby views Bill C-208, which amends the Income Tax Act, as an important legislative change that will help many small business owners who want to sell their businesses to their children.
With this law, “business owners can plan their retirement with more confidence, and will no longer have to choose between a bigger retirement fund or passing their business down to their children Nearly three quarters (72 per cent) of business owners are planning on exiting their business by 2028, and many are counting on the sale of their business to finance their retirement. It is absolutely outrageous that the federal government is ignoring legislation (Bill C-208) that was passed by Parliament and the Senate,” CFIB continues.
...and brokerage network is disappointed
The Insurance Brokers Association of Canada (IBAC) has expressed its views on this issue several times. The association is clearly dismayed by the Department of Finance's position.
“We're disappointed that Bill C-208 didn't become effective immediately after Royal Assent, which is normal convention. The implementation of this bill remains a priority for IBAC and for family-owned brokerages across the country. We will continue to advocate our position with Finance Canada and work with them to ensure that the principles of this bill are enshrined into law," CEO Peter Braid told Insurance Portal.
