Release suggesting 2022 implementation date carries no legal weight, but legal experts highlight technical deficiencies
A bill that would level the tax-planning playing field for certain types of business transfers within families won’t be delayed despite the Canadian Department of Finance’s misgivings, according to lawyers from Miller Thompson LP.
In a new commentary, Stephen Sweeney, William Fowlis, and Catherine Brayley discussed Bill C-208, which addresses rules under the Income Tax Act that effectively taxes certain owners of qualified small business corporations, fisheries, and farm businesses at higher rates when they sell shares to a corporation controlled by their children compared to selling shares to third parties.
“Finance had raised a number of objections to the Legislation and did not support it,” they said. “Nonetheless, the Legislation was passed by both Houses of Parliament with support from all major political parties.”
On June 29, the bill received Royal Assent and was passed into law. The next day, on June 30, the Department of Finance issued a news release with comments on the legislation. The release also suggested that since the legislation did not include an “application date,” the finance department would be able to propose amending legislation to “clarify” that it would apply starting on January 1, 2022.
“Some commentators have concluded that the News Release amounts to Finance overriding both parliamentary rules and federal law by delaying implementation of the Legislation,” the Miller Thompson lawyers said. “However, this is clearly not true.”
Citing the federal Interpretation Act, they said that if an Act does not come with a defined date of commencement, the commencement date will be taken as the date when said act received assent.
While proponents and supporters of Bill C-208 will likely take comfort in that knowledge, it still contains deficiencies, most relating to section 84.1 in the bill. Notably, there’s the possibility of the new rules enabling so-called surplus-stripping transactions, where individuals could conceivably structure transactions that aren’t legitimate intergenerational transfers as a sale of shares of their business that utilizes their lifetime capital gains deduction, effectively letting them extract cash from their corporation with little or no tax being paid.
“The new rules only require that a child or grandchild "control" the purchasing corporation,” said Sweeney, Fowlis, and Brayley. “That can be accomplished by arranging for the child or grandchild to hold only nominal-value voting shares … There is no requirement that the child or grandchild be engaged in the business, let alone hold true operational control of the purchasing corporation.”