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  • Charles Rotenberg


This quote from Sir Humphrey Appleby, the fictional Permanent Secretary and then Cabinet Secretary in the British series Yes Minister and Yes Prime Minister was clearly foremost in the minds of Prime Minister Trudeau and Finance Minister Freeland, when they issued a News Release on July 19th, 2021, to “clarify” the Government’s position on taxation of inter-generational transfers of small business shares.

The News Release states that “This news release seeks to bring clarity to the government’s intentions going forward and replaces the June 30th news release on this subject.”

On June 28th, I wrote about a Private Member’s Bill, C-208, that passed the House and Senate, and received Royal Assent. The object of this Bill, now an Act, was to put small businesses, including farming and fishing businesses, that wanted to keep their business in the family, on an equal footing with those that sell to outside parties. Previously, it was much more expensive tax-wise to sell to one’s children. I wrote about this in some detail on November 20th, 2017.

This legislation which, clearly, had some technical problems and could have led to some unintended tax benefits, was to take effect immediately upon Royal Assent. When the Bill was passed by the House, on May 12, the Government, including all cabinet members, opposed the bill.

Instead of addressing the problems with the Act, the Government said that they were going to repeal the legislation retroactive to the date of Royal Assent and introduce their own legislation to be effective January 1st, 2022. See my discussion on July 9th, 2021.

Aside from outrage from small businesses and their advisors, the Liberal Chair of the Commons Standing Committee on Finance called a special one-day sitting to sort out the confusion over whether the Finance Department could do what they proposed. The News Release happened to come on the eve of the Committee hearing – perhaps a coincidence, perhaps not. This “coincidence” was not lost on the members of the Committee.

The “clarification” in the News Release, states that the Government will table amendments to Bill C-208, to support intergenerational transfers of small businesses, and to close unintended tax avoidance loopholes.

It should be noted that, by definition, a “loophole” is an unintended tax result. Contrary to common belief, a loophole is not a tax provision that benefits certain taxpayers and not others. Tax policy – something sorely lacking in tax legislation in recent years – will often dictate tax benefits, for example, to generate investment in certain industries or to support things like green technology.

The News Release goes on to say "One loophole that Bill C-208 may inadvertently permit is the opportunity for “surplus stripping,” in which dividends are converted to capital gains to take advantage of the lower tax rate, without any genuine transfer of the business actually taking place,” and “The government intends to bring forward draft legislative amendments for consultation. Once completed, the government will publish final legislative proposals which would then be introduced in a bill and apply as of the later of either November 1, 2021 or the date of publication of the final draft legislation.”

Previously, the Government stated that any changes they introduced would be retroactive to the date of Royal Assent of Bill C-208. The Government has now “clarified” that any amendments will not apply until the later of November 1st, 2021, or the date of the tabling of the final legislation. If there is an election, this may delay the introduction of the Government’s amendments, which will also delay the effective date of the legislation. Of course, if the Liberals lose the election, any timetable for implementation of changes could be uncertain.

The News Release states that the Government will amend the legislation to “correct” any “tax loopholes” created by Bill C-208. Much of the “surplus stripping” that is being carried out by corporations and their advisors presently is not actually related to Bill C-208, but it is to be expected that the Government’s proposed amendments will affect surplus stripping, regardless of whether or not it is related to Bill C-208.

There has been much speculation about the possibility of an increase in the capital gains inclusion rate, likely from 50% to 75%. We must consider that such an increase could also be included in the Government’s draft amendments.

For those who may be in a position to consider surplus stripping, time is now of the essence.

I hope that there will not be any further tax news that needs to be reported on until the end of the summer.

Have a good summer, and stay safe.

- Chuck


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