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  • Charles Rotenberg


It isn’t a true anniversary, but close enough. On July 17th, 2017,a day that will go down in infamy, Morneau and Trudeau began their outrageous assault on small business, all the while claiming that they were there to support the middle class.

I, and many tax professionals, wrote extensively about this topic. For more information, see this link.

At the time, the Liberals promised to consult with farmers, fishers and small business owners to ensure that the rules for transferring small businesses to the next generation would be fair. At that time, and until a week ago, it has been much more expensive to sell a business to children or siblings, than it has been to sell to an outside party. The rules built in an economic preference for a farmer, for example, to sell to big-agra, than to keep the farm in the family. It’s a sad commentary that at a presentation in Ottawa, a senior tax partner of a national firm said that the best way to avoid the new rules was to avoid going into business with one’s children. For more detail on these rules, see the link to my article.

In the 2019 federal budget, the Liberal government said it would reach out to farmers, fishers and other business owners “to develop new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity and fairness of the tax system.”

Despite all of their promises, no changes were brought about by Trudeau and his minions.

In a startling turn of events, a private member’s bill, first introduced by Conservative MP Larry Maguire in the House of Commons last year, passed the Senate on June 22nd, and received Royal Assent on June 23rd. The rule change is effective immediately.

This is startling because it is very unusual for a private member's bill addressing tax matters to pass through the House. the Bill has received non-partisan support.

On May 12, the House of Commons passed Bill C-208 with the support of the opposition parties and 19 brave Liberal MPs. The government, including all cabinet members, opposed the bill – so much for supporting the middle class.

Prior to this change, a farmer, fisher or small business owner could not sell to a corporation owned by children, grandchildren or siblings and still claim the Lifetime Capital Gains Exemption (LCGE). Details of the importance of the LCGE can be found here.

The problem has been that if father sells to children and they, or their corporation gave father a promissory note for some or all of the purchase price, the Act would treat that amount as a taxable dividend, rather than a capital gain that would qualify for the LCGE.

This was the case even if the parties were actually buying and selling the shares and paying fair market value.

Without getting technical, the Bill (now an Act) amends Section 84.1 and Section 55 of the Income Tax Act to remove this barrier to keeping businesses in the family.

This is not the wild west. There are rules that need to be followed:

  • The taxpayer’s shares being transferred must be shares of a Qualified Small Business Corporation (QSBC), a family farm or a fishing corporation;

  • The corporation purchasing the shares must be controlled by either the children or grandchildren of the taxpayer, who are at least 18 years of age. (Note, there is also a change in the rules that will make it easier to reorganize, or sell, a business among siblings);

  • The purchasing corporation cannot dispose of the shares within 60 months of acquiring them (for a reason other than death); and

  • The taxpayer must provide the Minister with an independent assessment of the fair market value of the shares and an affidavit signed by the taxpayer and by a third party confirming the disposal of the shares. So there won’t be any paper “transfers” where in reality father keeps the shares and gets the tax benefits.

The Bill as written would also include a gift to the next generation rather than a sale.

There are details still to be released, for example, clarifying what third parties can, or need to, sign the affidavit, and who is needed to provide “an independent assessment of the fair market value”.

If I were a betting man, I would say that accountants will be busy determining values and attesting to the disposal of the shares. If an opinion of a Chartered Business Valuator is required, the cost of the transfer will go up significantly.

As an aside, since 2015, when the Government changed the rules in Section 55, a taxpayer is required to have a detailed calculation of “safe income on hand”, to show that a dividend can be paid without triggering significant tax costs. This is a lengthy and time-consuming exercise, and many accountants have difficulty being paid for these calculations – the clients just don’t see the benefit of the additional costs (at least until they get audited). The determination of fair market value will pose a similar problem.

Changes to the Business Corporations Act (Ontario) (OBCA)

Amendments to the OBCA will be proclaimed in force, effective July 5, 2021.

Non Resident Canadian Requirements for Directors:

There will no longer be a minimum number of resident Canadian directors required for Ontario corporations. This will simplify the incorporation of companies by non-residents of Canada. This brings Ontario into line with other Canadian jurisdictions.

Shareholder Resolutions May be Passed in Writing by Majority of Voting Shareholders.

Private Ontario corporations will be permitted to pass a written resolution of shareholders who hold a majority of the voting shares. Currently, either the signatures of 100% of the shareholders are required on a written resolution, or a majority of shareholders at a meeting can pass a resolution. If there is a recalcitrant shareholder, for example, the company has to go through the trouble of calling a meeting that involves delays, additional paperwork, and expense, but it is the only way, before the rule change, to pass resolutions without unanimous consent. It will now be possible to send out written resolutions for signing, and a majority of shareholders will be sufficient.

As with most legislation, there are rules that need to be followed, but this should simplify things for some Ontario corporations.

I hope that everyone stays safe and has a great summer, without surprises from the Liberal government (except perhaps an election call).



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