Capital gains changes nixed

A proposal to alter tax structure on sale of farm to family members was defeated by the Liberals

The federal government has voted down a private member’s bill designed to ease the tax burden on small business owners, including farmers.


New Democratic Party MP Guy Caron had been pushing the Liberals to pass Bill C-274, which would have amended the Income Tax Act so the transfer of a business to a child or grandchild was treated the same as the sale of the business to a third party.


The Liberals defeated the bill, at second reading, in the House of Commons last week.


The Canadian Federation of Independent Business supported the bill, arguing the current system is a “costly flaw in Canada’s succession planning rules.”


In a news release, the CFIB said when an individual sells their business to a family member the difference between the purchase price and sale price is treated as a dividend.


If sold to someone else, it is classified as a capital gain.


“Most business owners have no pension plan and therefore they come to rely on the sale of their business to fund their retirement,” said Marilyn Braun-Pollon, CFIB vice-president for prairie and agribusiness.


“What the bill aims to do is address the flaw… that incredibly makes it easier to sell a family business to a third party than a member of the family.”


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Caron has been touting his private member’s bill since the spring of 2016. 


In a Western Producer article from June 2, Caron said the difference in taxes on the sale of a million dollar business can be around $200,000.


“For a $10 million farm, we are talking $2.2 million less if the owner sells it to a stranger rather than a family member.”


Larry Maguire, Conservative Party MP for Brandon-Souris, said in a blog post that the Liberal’s defeat of the income tax change is a loss for prairie farmers.


“It is not surprising the Liberals voted against (western Manitoba) farm families and small business owners as they completely ignored agriculture in their throne speech and immediately broke their word on reducing the small business tax.”


The Conservatives, though, didn’t amend business succession rules when they were in power. Liberal MP Emmanuel Dubourg introduced a bill similar to Caron’s in 2015.


James Kraft, of BMO Wealth Management, said in an article on advisor.ca that there’s a reason for Section 84.1 of the Income Tax Act, where transfers within a family are treated differently than a sale to another party.


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“Because there are ways to abuse the lifetime capital gains exemption,” Kraft said, which is worth $835,716. For farmers it is $1 million.


Kraft said a person could sell a company to their child to get the capital gains exemption and the child would become the owner for legal and tax purposes but the parent could remain the decison maker.


“If I can get you $800,000 and use up your capital gains exemption, you’ve got $800,000 to spend tax-free, and you still own your business,” Kraft said


Braun-Pollon admitted the change to the income tax code, if enacted, would cut into government revenues.


“At a time when they are running deficits for the foreseeable future, any changes that would hit the treasury… they are reluctant to do that.”


Nonetheless, she said business owners who sell their operations to family members should be treated the same of those who sell to third parties.


“Given the major succession train coming down the track, this is (something) we do need to look at,” she said. “This is a tax change that all parties could support.”


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The Canadian Federation of Agriculture expects $500 billion in farm assets to change hands over the next decade.