The debate is certainly heating up over the federal government’s proposed tax changes with several observers jumping in on various sides of the argument.
There is a fair amount of misinformation and misunderstanding surrounding the issue.
To be fair, every year the government routinely issues numerous motions and budget items to alter tax legislation.
Why the controversy now?
Part of the issue is that the government sees a large source of revenue that could help finance massive spending programs and resulting debt.
The Liberals have chosen to present this change as closing a loophole that provides unfair advantage to business owners over salaried employees.
Many of the major television news networks have chosen to pick up the government’s spin word on the issue by describing business taking unfair advantage of a loophole. The word implies it was never an intended feature of the Tax Act and that it is being unfairly abused by the business community.
This is untrue because the Tax Act has always acknowledged the in-creased risk taken by private businesses in order to generate additional employment and tax streams for government, hence the flexibility in taking income out of the business.
Here is one example of how farm families will be affected by the change in legislation.
First, the existing situation.
Farmland owned by parents for 30 years is transferred to their 20-year-old daughter using the inter-generational rollover prior to July 18, 2017.
The $1 million accrued capital gain applies, as does the $1 million capital gains exemption if the daughter decides to sell the land in three years. There is no requirement for the daughter to be in the business of farming to claim the exemption as long as her parents were in the farming business.
The July 18 proposed rules change the game.
The capital gain that accumulated on the land before the daughter turned 18 is not eligible for the exemption (28 years of ownership being 30 years total ownership less the two years that the gain accrued after the daughter turned 18).
The fact that the parents owned the land for 30 years of this 33-year ownership period (when the daughter sells) before the sale does not matter.
This means that when the daughter goes to sell the land, she will be eligible only for $151,515 of the $1 million exemption.
What’s the message here?
- This completely reverses the government’s previously stated policy of no taxation on intergenerational transfers.
- A capital gains exemption is denied during the period when the child was not even born.
This is only one example of the potential unintended consequences of these tax changes.
With one stroke of the pen the government can fix this by making intergenerational transfers an exception to this disappointing piece of legislation.
Unfortunately, there are many other elements of this legislation that will make it far less appealing for new investors to buy the assets of longtime risk-takers, preventing the latter from enjoying a reasonable retirement payout for their husbandry of the business.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.