Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation)
Honourable senators, I am pleased to add my voice to the debate on Bill C-208.
I would like to thank Senator Griffin for her leadership on this bill, as well as other senators who have spoken to it.
The impulses behind this bill are laudable. We can all agree on the importance of tax fairness, family farms and a healthy and thriving agriculture and fisheries sector. This bill, however, has moved through the Senate extremely quickly, to the point where we are now on the precipice of the third reading vote. I fear we have gone too quickly and have not put in the requisite scrutiny to allow for a well-informed decision.
I note, for example, that the bill was sent to committee after only two second reading speeches. With due respect, the second reading speeches were detailed in their coverage of the specifics of the bill, but they were light on its principles and the broader implications.
At committee, there was strong support for the bill from the farming, fishing and accounting communities, all of which will, of course, benefit from the proposed amendments. But there were serious reservations raised by Department of Finance Canada officials, none of which came out in the report from the Standing Senate Committee on Agriculture and Forestry — not even in observations. Those reservations were brushed aside in what appears to have been a rush to get to clause-by-clause consideration. The report provides us with none of the nuance that was heard in committee, and it conveys the impression that this bill was given a clean bill of health.
Before you vote on this bill, colleagues, I ask that you at the very least read the transcripts of the Agriculture and Forestry Committee hearings and pay attention to all of the testimony, including the reservations expressed by Finance Canada officials.
The gist of their reservations — and here I am repeating a bit of what Senator Gold has said — is that the proposed amendments will open tax avoidance opportunities that go well beyond fishing and farming operations. For example, there are no safeguards in the bill as written to prevent a family member from setting up a corporation that receives shares of a farming business from a parent or grandparent and then turning the business back to the parent or grandparent to run. In doing so, the tax savings could be considerable, but it should be clear that the intent of such an action is not the intergenerational transfer of family farms or fishing corporations; it is tax avoidance, plain and simple.
Some of you might think that a little bit of tax leakage might be a price worth paying for the preservation of family farms and fishing operations, but consider the following: This bill covers all qualified businesses, not just farming and fishing operations. The PBO has estimated that there were 1,674,310 qualified businesses in 2014, of which 50,000 were farming corporations and 4,000 were fishing corporations. You can do the math, colleagues, but that means that farming and fishing corporations make up a mere 3% of eligible, qualifying businesses. That percentage is likely overstated, because the number of farming and fishing operations has likely fallen relative to the total number of qualified enterprises over the last seven years.
This bill will open tax avoidance opportunities not just for the 3% of farming and fishing operations that we seem to be focused on, but also for the 97% of other corporations that are eligible.
Given that this bill was studied in the Agriculture and Forestry Committee, there was very little attention paid to the potential users and abusers of the proposed exemption on non-primary-sector corporations. Perhaps the bill should have been studied in the Finance or Banking Committees.
It is too late now, but there is no question in my mind that there have been some major omissions in our collective scrutiny of this bill.
Even if this bill were solely focused on farming and fishing operations, the removal of an anti-avoidance measure opens the door to more aggressive tax planning well beyond those sectors. Surplus-stripping, or asset-stripping, is an issue that affects all corporations in all sectors, which is why an exemption allowing for such in one sector will provide fodder for litigation in other sectors, making it much harder for the CRA to defend anti-avoidance measures in all areas of the tax code.
I understand that this bill is framed as an issue of tax fairness; that a sale of corporate assets to family members should be treated in the same way as a sale to third parties. There is a logic to this view. But selling to family members, dear colleagues, is, by definition, not an arm’s-length transaction. Unless we are prepared to say that related-party transactions are arm’s-length transactions, we simply cannot treat the two in the same way. To do so would undermine a key principle in tax policy, with potentially far-reaching unintended consequences.
Some of you might recall that we had a similar discussion in 2017 when we debated a provision in the budget implementation act to limit the ability of Canadian-controlled private corporations, or CCPCs, to “sprinkle” shares to family members. The “sprinkling” of shares was defended on similar grounds to the ones that we are hearing on this bill: It was a way for owners of private corporations — often doctors and lawyers — to retain surpluses in the family as a form of savings for retirement. It’s a very similar argument. We rejected those arguments in 2017, and I believe rightly so, because of — wait for it — tax fairness.
We should reject this bill on similar grounds.
It might be possible to design an amendment or a bunch of amendments that protect against some of the unintended consequences of this bill. We heard a number of ideas in committee about how that might be done. But here, again, there was no attempt to explore these options further, either in committee or in observations that accompanied the report.
I would add that the issue of tax fairness, fundamentally, is a function of the differential between the tax treatment of capital gains and dividends, which currently stands at a high of about 20 percentage points. It depends upon which province you are in. That differential is a matter of policy, and it can be narrowed by changing the tax rates on either side, capital gains or dividends, with potentially positive implications for reducing income and wealth inequality in this country.
But that option was not explored in this committee, and understandably so, because it was the Agriculture and Forestry Committee. But that reinforces my earlier point that perhaps we should have asked the Finance and/or Banking Committees to also take a look at this bill.
Finally, this bill has been touted as a solution to the problem of the disappearing family farm. I’m very sceptical about this proposition. The diminishing number of family farms in this country has much more to do with business models than it has to do with the tax code. If anything, transferring a loss-making farm corporation within the family could simply mean transferring a loss-making operation from one generation to the next.
Colleagues, Canada has lost one third of its farmers and two thirds of its young farmers in just a single generation, but that is not because of tax policy. This is confirmed by studies on the changing nature and structure of agriculture in Canada. In Ontario, for example, for every dollar spent on farmland in the 1970s, that farmer could hope to generate 4.7 cents in net returns. That number has fallen to about 1 cent in the last decade.
It is a similar story in Manitoba. In the 1970s, a dollar spent on farmland would, on average, yield 8.7 cents in net farm income. Over the past two and a half decades, a combination of falling net incomes and rising land prices has created a situation where Manitoba farmers today generate just 2 or 3 cents for every dollar they spend on land.
Let me put it a different way: There has been a large reduction in the number of farms in Canada, from approximately 300,000 a generation ago to roughly 200,000 today. Realized net farm income over the most recent decade averaged $3.5 billion annually. Let’s assume it takes $75,000 in net income to support a family. That means that $3.5 billion in aggregate income annually for the sector as a whole can only support 47,000 farm families — but we have 200,000. The reality for most Canadian farm families is that they operate in a sector that simply cannot financially support them.
The problem of low net incomes of family farms is complicated, and it has to do with the structure of modern agribusiness. It will not be altered overnight. Any policy that facilitates the transfer of farm assets within the family, but does not address some of these structural issues, will do little to stem the decline in family farms.
One could even argue that transferring a farm corporation outside the family could be better for that farm if the new owner brings a better business model to its operation. I’m not necessarily referring to an anonymous megacorporation, but it could be another family that wants to enter the business with new ideas about how to make it work. Intergenerational transfers are not the only means to retain farms that are operated by families.
I heard the view expressed in committee that even though this bill is flawed, we should pass it anyway because doing so will spur the government to come up with the regulatory fixes that are needed, or even come up with a new law that properly addresses the issue. Colleagues, that amounts to saying that we should pass a flawed law in order to get a good law — not a good law that is imperfect, as we often deal with, but a flawed law to start with. I don’t think that is a good way to think about our role as a chamber of careful reflection and deliberation. In fact, I think that is an irresponsible approach to legislation.
I also understand that many of you are responding to calls from your constituents to vote in favour of this bill. No surprise here, given that there are perhaps 2 million qualifying enterprises in the country that could benefit from the bill. By the way, 97% of them are not farming or fishing operations. Each of us will have heard from a business that is affected. The fact that MPs in the other place would feel pressure to respond to a populist bill is understandable, but I would like to think that we are less vulnerable to such pressures.
We, of course, must be responsive to the people and regions we represent, but the very nature of the Senate allows us to look at the bigger picture, take the longer view and resist measures from the other place that do not meet the test of national interest.
Honourable senators, there have been many speeches in this chamber over the past years railing against tax avoidance or what some might call aggressive tax planning. This bill works in the opposite direction. I have no doubt that it will encourage tax avoidance and aggressive tax planning. If you think that is okay because we’re only talking about small businesses rather than megacorporations, my response is that the tax code should operate on the same principles regardless of size.
Not only that, but the notion that this bill is mostly about mom-and-pop businesses is erroneous to start with. The exemptions proposed under this bill allow for intergenerational transfers of up to $15 million in tangible, taxable capital. According to Statistics Canada, in 2011, less than 0.5% of all privately owned corporations with fewer than 500 employees had assets greater than $7 million. That means more than 99.5% of private corporations, under this definition, will be covered.
I will sum up. The case for this bill is built on two propositions: Tax fairness and the protection of family farms and fishing operations. Both are worthy goals, and I commend my colleagues for their advocacy on these issues. However, this bill is flawed for three key reasons: it cannot truly address tax fairness without properly closing surplus extraction opportunities in related-party transactions; family farms and fishing operations constitute only a very small portion of the businesses that would be captured by this exemption; and it does not address any of the structural problems facing family farms and could in some ways even accelerate the decline of that sector.
I wish we could take more time to properly study this bill. However, if we do not have the luxury of more time, I hope you will join me in rejecting it. Doing so would not be a rejection of tax fairness or family farms. It would be an affirmation of our role as legislators who take the broader view and who can resist measures that may be popular but which are not in the public interest.