Lawyers at Western Canada firm explain implications of income tax changes
Federal Bill C-208, upon receiving royal assent, will introduce friendly tax changes for farms and small businesses and will present certain planning opportunities for those considering a reorganization involving an intergenerational transfer of shares, sat lawyers at Western Canadian firm MLT Aikins LLP
In a blog post “Parliament Passes Friendly Tax Changes for Farms and Small Businesses,” Aaron Haight and Emily Barlas called attention to the changes to s. 55(5)(e) and s. 84.1 of the Income Tax Act (Canada) introduced by the bill, which was passed by the federal House of Commons as a private member’s bill on May 12 and by the Senate without amendment on June 22.
According to the blog post, the bill may offer more options to tax professionals advising clients with intergenerational transfers of shares of a qualified small business corporation or of a family farm or fishing corporation and may promote better flexibility and planning opportunities for intergenerational transfers of shares of such corporations on a tax-deferred basis.
The blog post explained that s. 55(2) of the Income Tax Act (Canada) treats transactions, which would usually be considered dividends, as taxable capital gains in certain situations, but corporations may avail of an exception and avoid this recharacterization if they comply with the rules in s. 55(3)(a).
While under the law, no “unrelated person” may be involved in the reorganization transaction or series of transactions for the rules to be applicable, a problem may arise whenever siblings are involved, given that s. 55(5)(e) treats siblings as unrelated for the purpose of s. 55, added the blog post.
The bill will amend s. 55(5)(e) such that the rule deeming siblings to be unrelated would not be applicable if it is a qualified small business corporation or a family farm or fishing corporation that is conducting the reorganization, and such that dividends paid or received by such corporations, wherein siblings have an ownership interest, will be covered by the exception under s. 55(3)(a), said the blog post.
The blog post then discussed s. 84.1, which disallows individual shareholders from accessing corporate surplus, which can otherwise be paid out as a tax-free return of capital, in a sale of shares to a corporation in a situation wherein the transferor is not dealing at arm’s length.
The blog post said that the amendment to this provision will add a narrow exception in s. 84.1(2)(e), such that the transferor and the purchaser corporation will be treated as dealing at arm’s length, if the following conditions are met: if the transferred shares are qualifying shares, if an adult child or grandchild of the transferor controls the purchaser corporation and if the purchaser corporation fails to dispose of the transferred shares within 60 months from the transaction’s date.
The blog post’s authors, Haight and Barlas, are both Saskatoon-based associates at MLT Aikins. Haight focuses on taxation, corporate commercial transactions and estate planning matters and has experience in the agriculture industry.
