August 23, 2021 by Bud Arnold

The rules of family farm transitions are changing

When selling a farm corporation, there are more tax advantages selling to a stranger than to someone in your own family. It has always been difficult to transition corporate-owned farms to the next generation, because the sale of a corporation within a family is taxed at a punitive rate – one that would be lower if the buyer was an unrelated person.

We’ve been aware of this problem for a number of years, and many Members of Parliament have attempted to update the rules. Changes were finally made in recent months when Bill C-208, which amends sections 55 and 84.1 of the Income Tax Act, received Royal Assent and became law on June 29, 2021. While the rules are still in flux and additional updates are expected in the months ahead, the initial changes are now in effect.

Changes to section 55

Section 55 aims to stop businesses from stripping out value from one corporation to another, reducing a capital gain – and their tax bill. For those looking to avoid capital gains tax, section 55 effectively says, “No, you can’t do that.” However, there are rules that allow businesses to move value from one corporation to another if they’re not selling the corporation. Bill C-208 expands those rules, allowing you to also move assets between eligible corporations owned by siblings. This is helpful in a situation where a farm corporation is owned by two siblings who want to split it in two and pass their respective share on to their children.

Changes to section 84.1

The more problematic components of Bill C-208 are the changes to section 84.1 of the Income Tax Act. This section aims to stop businesses from stripping value out of a corporation to an individual at capital gains tax rates, rather than the higher dividend tax rates. The recent changes allow share sales of eligible active business corporations – including farm corporations – to go from one person to a corporation controlled by their children or grandchildren at capital gains tax rates.

However, there are a few problems with the legislation. The definitions aren’t entirely clear, references to other sections of the act are problematic, and there are no filing deadlines, penalties or forms prescribed to do the relevant reporting. The biggest problem for the Department of Finance is the new rules do not require the share sales to be a true farm or business succession. A parent could sell their farm corporation shares to their child’s corporation but continue running the farm for the next 20 years – and there’s nothing the rules can do to prevent this. As a result, the Department of Finance is currently working to amend the bill, limiting the availability of this opportunity to true successions.

Following Québec’s example

Québec has its own Income Tax Act, including some rules similar to what’s been included in Bill C-208. In addition, there are rules requiring the owners selling shares to be actively involved before the sale and transitioning their management role to the successors as part of the transaction. In other words, some form of succession of management and operations is required. These rules also require a succession of share interests, so the original owner’s shareholdings and interest in the farm corporation decrease over time, as the successor becomes increasingly involved. The Department of Finance plans to revise Bill C-208 to point in the same direction.

What now?

While we don’t know exactly what changes are coming, revised rules will apply as of either November 1, 2021, or the date of publication of the final draft legislation, whichever comes later. With that in mind, you have until the end of October to act on the current rules where possible.

Meet the Author

Bud Arnold Bud Arnold
Guelph, Ontario
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