Until recently, it was more tax efficient for Canadian farmers to sell their business to a stranger than a member of their own family.
Ninety-eight per cent of Canadian farms are family owned, with assets increasing significantly in value over the years. The average Canadian farmer is 55 years old and may be looking to pass their business to the next generation.
The whole problem could be summed up in one question: why should a stranger receive better tax treatment than a child if farmers wish to keep their business within their family?
On June 29, Bill C-208, which is an amendment to the Income Tax Act that will make it easier for farmers to keep their business in the family, received royal assent. With more than 270,000 farms and operators across the nation, the passing of Bill C-208 is life-changing news for many Canadian families.
This amendment to the Income Tax Act will ease the transition of family businesses to the next generation and set aging farmers up for a more secure retirement.
Bill C-208 will adjust two specific provisions that can create challenges in transitioning ownership of a family business to family members in a tax-efficient manner, often hampering the continued success of the business.
The first provision contains adjustments to Section 55, which previously obstructed a family’s ability to pass down the generational farm where multiple siblings were involved, as it did not characterize siblings as “related”. This was especially relevant when all siblings did not intend to pursue the family business equally. In addition, families may not have liquidity to pay taxes that would result from a transaction in which a successful split between siblings cannot happen.
Bill C-208’s amendment will allow business or farming assets to be split more efficiently and affordably between siblings.
The second provision is section 84.1, which was in place to prevent the use of a person’s lifetime capital gains exemption to extract a corporate surplus on a tax-free basis when there is a related corporation used in the acquisition of the shares of the other corporation.
While a parent could, previously, sell the business to an unrelated corporation and claim the capital gains exemption, selling shares of a corporate business to an incorporated child proved difficult.
To use the capital gains exemption from the sale and receive the proceeds tax-free, the child had to repay the purchase price with personal funds. Without receiving additional salary or dividends from the business to pay the personal taxes, this proved difficult. The inability of parents to use their capital gains exemption to transfer their business to their child was an obstacle that Bill C-208 will see amended.
The amendments will level the playing field by giving families the same tax treatment when they transfer their businesses or operations to their children as when they transfer it to a stranger.
On June 30, the federal finance department issued a news release to advise of their intention to delay the effective date of the Bill C-208 amendments to Jan. 1, 2022. It is expected that amendments to Bill C-208 could also be introduced before 2022 to address its concerns with the legislation.
Dustin Mansfield is a partner in BDO Canada’s Brandon office.