Farmers are advised to take advantage of the revamped Bill C-208 because it offers them significant tax savings when it comes to succession.
Brandon-Souris MP Larry McGuire initially introduced it as a private member’s bill in 2021. It sought to amend the federal Income Tax Act to exclude the intergenerational transfer of farms and other small businesses from current anti-avoidance rules. Under the changes, those transfers receive equal capital gains treatment as do businesses selling to unrelated parties.
Capital gains are the profits from the sale of property or an investment. Every Canadian has a $1 million lifetime capital gains exemption, meaning the first $1 million is not taxed and anything over $1 million is taxed at 25 percent.
But until Bill C-208, anti-avoidance rules in Canada’s Income Tax Act characterized capital gains earned for shares sold to a family member’s corporation as a taxable dividend, which came with a tax rate of 46 percent. They were ineligible for the capital gains exemption.
Shares sold to a third party, however, would not be viewed as a taxable dividend and would be eligible for the exemption.
The bill passed in 2021, but in a release issued in July of that year, federal finance minister Chrystia Freeland said amendments to the legislation were needed to close tax avoidance loopholes that may have resulted from the bill. Those amendments came into effect on Jan. 1 of this year.
Among those changes were the removal of a requirement that purchasers have to hold shares for at least 60 months after purchase. Changes also introduced two different transition plan term options: an immediate (three-year) or a gradual (10-year) approach.
Gaining capital gains treatment eligibility is “very important because it gives us the lowest tax rate,” said Edith Frison, a tax specialist with MNP in Brandon.
“It was pretty unfair that if we were selling our business to our own child, we weren’t allowed to get capital gains treatment or use capital gains exemption, but if we were selling to a third party, we would,” she said.
“Why would you ever want to pass on equity from something you built your whole life to some stranger instead of your own child?”
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