The federal government is withdrawing several controversial tax changes and will consult with farmers and other small businesses on rules that could make intergenerational transfers of family enterprises simpler, Finance Minister Bill Morneau announced Oct. 19.
He capped a week of backing down on tax changes affecting farmers, fishers and other small businesses by announcing the government will reach out to business owners over the coming year to develop proposals that would better accommodate intergenerational transfers “while protecting the fairness of the tax system.”
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Earlier in the week, Morneau said the small-business tax rate would be reduced to nine per cent by 2019 from the current 10.5 per cent. He also promised clear rules on paying family members who work on a farm or in a small business.
“In our last budget, we recognized the agri-food sector as one of the most important for Canada’s economy, setting an ambitious goal to increase agri-food exports to $75 billion by 2025,” Morneau said. “We want to see farm and fishery families succeed… We will work to protect family farms and fisheries, and the ability of all family-run business owners to pass down the results of their hard work to the next generation.”
The minister did not say when legislation to bring the tax changes into effect would be presented to Parliament, but farm and many other business groups are expected to scrutinize that bill closely.
Ron Bonnett, president of the Canadian Federation of Agriculture, applauded the minister’s willingness to “halt and reconsider a series of proposed tax reforms that would have led to severe negative impacts for family farm businesses.”
Proposals advanced in July to limit the lifetime capital gains exemption and options to convert income to capital gains “would have led to enormous complexity and added costs for intergenerational farm transfers and could have even encouraged farmers to sell their businesses to non-family members,” Bonnett said.
Earlier announcements on “a simplified reasonableness test and a minimum threshold on the taxation of passive investment income also appear to be steps in the right direction,” he said. “CFA will study the final proposals once legislation is tabled in Parliament, and looks forward to working with Finance Canada to ensure further issues are adequately addressed.”
John Ross, executive director of the Canadian Pork Council, said the announced changes “are going in the right direction. But we want to see what the whole package looks like at the end. The devil is in the details.”
The government would have been better off if it had reached out to the agriculture community before proceeding with the announcement of the proposed changes back in July, he said.
The Canadian Cattlemen’s Association also called Morneau’s announcements “a step in the right direction. We thank the government for recognizing the need to rescind its planned capital gains changes, as work undertaken by the CCA and other agriculture groups shows moving forward as intended would have significant unintended consequences in terms of increased cost, from tax perspective, to transfer farm in family compared to third party.”
The tax proposals released back in July “were counterintuitive to the government’s goal for positioning Canadian agriculture as a strategic growth sector and significant job creator,” CCA said. “Government tax policy should be designed to encourage investment and growth within the sector and help farmers manage risk, not become one of the risks that they need to avoid.”
Dan Kelly, president of the Canadian Federation of Independent Businesses, said the lower tax rate will “pump hundreds of millions of dollars back into the small-business community, helping it create more jobs and grow the economy.
“Still, the changes to rules allowing business owners to share income with their family members remain a concern for middle-income businesses,” he said. It welcomed the decision not to limit access to the lifetime capital gains exemption. However, CFIB remains concerned that the changes may not reflect the many formal and informal ways family members participate in the business.
“We will wait for details and analysis on all the changes before passing judgment on the entire package,” Kelly said.