A non-public member’s invoice geared toward facilitating intergenerational transfers of small companies and farms has moved one step nearer to changing into regulation. After passing third studying within the Home of Commons on Could 12, 2021, with 199 MPs voting in favour and 128 in opposition to, Invoice C-208, An Act to amend the Revenue Tax Act (switch of small enterprise or household farm or fishing company), should now be voted on by the Senate.
The Invoice’s main focus is limiting the doubtless harsh software of part 84.1 of the Revenue Tax Act in circumstances of intergenerational transfers of companies and farms. Part 84.1 is an anti-avoidance rule that typically prevents a person from avoiding tax that may in any other case come up on a taxable dividend by transferring shares to a non-arm’s size purchaser company.
The present drafting of part 84.1 considerably impedes tax-efficient intergenerational transfers of small companies and farms. If an owner-manager had been to promote small enterprise shares to an arm’s size social gathering, the sale is handled as a capital acquire. The owner-manager advantages from the decrease charge relevant to capital positive factors and can also be eligible to assert the lifetime capital positive factors exemption. In distinction, if the proprietor had been to promote shares to an organization owned by a baby or grandchild, part 84.1 can function to tax the proprietor as if she or he acquired a dividend. A dividend is taxed at the next charge and can’t be sheltered by the lifetime capital positive factors exemption.
Intergenerational transfers are thus penalized relative to arm’s size gross sales. This end result places an owner-manager within the troublesome state of affairs of getting to bear extra tax, and subsequently diminished retirement funds, if she or he needs to maintain the enterprise within the household.
The Invoice proposes to offer a carve out from part 84.1 for gross sales of “certified small enterprise company shares” and “shares of the capital inventory of a household farm or fishing company,” each outlined phrases within the Act (“Qualifying Shares”). The carve-out would apply the place three situations are glad:
- the transferred shares are Qualifying Shares;
- the shares are transferred to a purchaser company that’s managed by a number of of the owner-manager’s youngsters or grandchildren who’re 18 years of age or older; and
- the purchaser company doesn’t eliminate the transferred shares inside 60 months of buying them.
The Invoice additionally proposes a small however very helpful modification to part 55, one other anti-avoidance rule within the Act, to facilitate tax-deferred reorganizations of family-owned companies and farms which contain sibling possession.
It stays to be seen whether or not Invoice C-208, launched by Manitoba Conservative MP Larry Maguire, will advance by way of the Senate or will stale within the face of summer season recesses or a untimely Federal election. Whereas it is rather uncommon for a personal member’s invoice addressing tax issues to move by way of the Home, the Invoice has acquired non-partisan help and follows prior makes an attempt by each the NDP (Invoice C-661, 2015; Invoice C-274, 2016) and the Liberal social gathering (Invoice C-691, 2015).
If enacted, Invoice C-208 would permit homeowners of small companies, farms and fishing companies to pay the identical tax when promoting to a member of the family as they might in the event that they bought to an arm’s size purchaser, a end result that’s lengthy overdue. Contact any member of the Bennett Jones Tax group in the event you want to focus on how the enactment of Invoice C-208 might profit your small enterprise or farm succession plan, or exit technique.