Senate passes bill addressing tax treatment of selling farms, fisheries to kids

Owners of family farms and fisheries will be able to pass their businesses to their children without triggering tax consequences that leave them worse off than if they sold their business to an unrelated third party after Bill C-208 passed third reading in the Senate on Tuesday.

The private member’s bill, first introduced by Conservative MP Larry Maguire in the House of Commons last year, would also provide greater flexibility for the restructuring of family businesses that involve siblings of the owner of the small business. The bill will be effective once it receives royal assent, which is expected to happen before Parliament rises this week. (Editor’s note: Bill C-208 received royal assent on June 29.)

On May 12, the House of Commons passed Bill C-208 with the support of the opposition parties and 19 Liberal MPs. The government, including all cabinet members, opposed the bill.

Currently, anti-avoidance rules in the Income Tax Act — designed to prevent the re-characterization of dividends into tax-advantaged capital gains — may catch transfers of farms and fishing businesses to the owners’ children and grandchildren.

As a result of the rules, the proceeds of disposition on a sale of a business to a child would be taxed as a dividend, while the proceeds of a sale to a third party would be taxed at the more advantageous capital gains rate and would also allow the seller to access the lifetime capital gains exemption.

Bill C-208 would amend the Income Tax Act in order to provide that, under certain conditions, transfers of qualified small business corporation shares and shares of the capital stock of a family farm or fishing corporation by a taxpayer to the taxpayer’s adult child or grandchild are to be excluded from the anti-avoidance rule of section 84. The bill would also amend section 55 so that siblings are deemed not to be dealing at arm’s length, which provides greater flexibility for intergenerational transfers under a related party exception.

The problem of the tax treatment of intergenerational transfers of family farms and fisheries has been a long-standing one. Three previous attempts to address the issue through private member’s bills, the first of which was in 2015, failed.

In the 2019 federal budget, the Liberal government said it would reach out to farmers, fishers and other business owners “to develop new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity and fairness of the tax system.”

However, the bill’s supporters argue the issue has become urgent.

“If we want to ensure the next generation of family farms is in strong financial health to capitalize on the immense opportunities facing our sector and drive Canada’s economic recovery, we cannot burden them with undue tax liabilities from day one,” said Canadian Federation of Agriculture president Mary Robinson in a statement responding to the bill’s passing.

“This important bill finally addresses an anti-avoidance rule in our Income Tax Act that next to everyone agrees places a deep unjust tax burden on those wishing to complete a genuine intergenerational transfer of a family-owned small business, farm or fishing operation,” said Colin Deacon, an independent senator from Nova Scotia.

In a statement to Advisor’s Edge, Barry Pascal, chairman of the Conference for Advanced Life Underwriting in Ottawa, said that Bill C-208’s passing would “address unfair tax penalties” for business owners looking to sell to family members when they retire.

Intergenerational transfers “facilitate greater business continuity and avoid adding to the disruption that businesses already have to deal with as they try to get operations back on track post-pandemic,” Pascal wrote.

However, detractors of the bill say that while its intent is worthy, it could create tax avoidance opportunities that would disproportionately benefit wealthy Canadians.

“I have concerns that the bill lacks the proper safeguards to ensure that the business transfer is actually real and not just on paper,” said Nova Scotia Senator Jane Cordy. “There is no guarantee that the business would not be sold in name only in order to take advantage of the tax breaks in Bill C-208. This would be in complete contradiction to the intention of the bill.”

It’s possible the Department of Finance will “finetune the legislation in the future to address ambiguities and anti-avoidance concerns” in response to Bill C-208, Pascal wrote. He suggested that clients seek out legal and tax advice before entering into a sale with family members to make sure the sale qualifies under the amended rules.

“Insurance advisors will need to become familiar with how the exemption might apply and ensure their clients are getting appropriate professional advice,” Pascal wrote.