Intergenerational transfers with less strings attached (a limited time offer)
Many family-owned businesses have faced higher tax burdens when transitioning their business within their family. This effect has been due, in part, to two anti-avoidance provisions in the Income Tax Act (ITA) that are designed to prevent unapproved transactions deemed abusive by the Department of Finance. Section 55 prevents unapproved, tax-deferred capital gains stripping; section 84.1 prevents unapproved, tax-free surplus stripping. In a nutshell—an oversimplified nutshell—these two complex anti-avoidance provisions recharacterize what should be tax-free transactions into taxable ones.
The problem with anti-avoidance provisions is creating legislation that properly distinguishes between abusive and non-abusive transactions: a fundamental problem for the transition of family-owned businesses to children and grandchildren, or between siblings.
For many years, taxpayers and professional organizations have lobbied the federal government to carve out exceptions to these anti-avoidance provisions for legitimate transfers of family-owned businesses. Until 2021, no such exceptions had been implemented due to the Department of Finance’s inability to distinguish properly between legitimate and illegitimate transitions. Now, on June 29, 2021, private members Bill C-208 received Royal Assent, amending these anti-avoidance provisions to allow exceptions for transfers of qualifying small business corporations and family farm or fishing corporations. Based on paragraph 6(2)(a) of the Interpretations Act, these amendments to the ITA are enacted into law upon receiving Royal Assent.
The Department of Finance did not support the amendments in Bill C-208 and unsuccessfully contested the bill at the committee level, both in the House and the Senate, citing a lack of controls preventing abusive transactions. The day after the bill received Royal Assent, Department of Finance made a public announcement proposing to introduce legislation clarifying that the amendments will not apply until January 1, 2022, six months after receiving Royal Assent. Only nineteen days later, on July 19, the Honourable Chrystia Freeland, affirmed that Bill C-208 was, in fact, enacted into law upon receiving Royal Assent and is currently part of Canada’s Income Tax Act.
The Honourable Chrystia Freeland further stated that the government intends to bring forward draft legislative amendments to the Income Tax Act that honour the spirit of Bill C-208 while safeguarding against unintended tax avoidance loopholes. These safeguarding legislative amendments will only apply after November 1, 2021.
This provides a small window of opportunity to complete intergenerational transfers with minimal overarching criteria.
Baker Tilly has been following Bill C-208 since its introduction in 2015, and we will continue to follow the developments as they unfold between now and November 1, 2021. Additional criteria for transitioning family-owned businesses among family members is on the way, so if you are considering a transition with less strings attached – you may wish to act sooner than later.
If you have any questions or concerns regarding the transition of your family-owned business, reach out to your local Baker Tilly advisor. For additional information about the history of Bill C-208, check out the following blogs from our National Director of Tax:
Information is current to July 20, 2021. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.