Bill C-208 Intergenerational Transfer Update

On July 19, 2021, the Department of Finance issued a press release clarifying their previous release of July 2, 2021. It notes:

• The changes contained in the legislation now apply in law (as opposed to January 1, 2022 as indicated in the prior release).

• The government intends to amend the legislation to safeguard against any unintended tax avoidance loopholes, such as the ability to “surplus strip”.

• The draft legislative amendments would be brought forward for consultation.

• The amendments would address items such as:

  • the requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;

  • the level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;

  • the requirements and timeline for the parent to transition their involvement in the business to the next generation; and

  • the level of involvement of the child or grandchild in the business after the transfer.

• Final legislative proposals which would apply as of the later of either November 1, 2021, or the date of publication of the final draft legislation.

July 9, 2021 – Commentary on Bill C-208 re. Intergenerational Transfers (Lanthier)

On July 8 and 9, 2021, two articles by Alan Lanthier* were released in respect of the status of, and expectations for, a federal private member Bill which facilitates more tax-efficient intergenerational transfers of businesses (Bill C-208). Royal Assent was received on June 29, 2021.

In particular, the articles discuss

• the problems with the old legislation;

• the road to the new legislation;

• the basics of the new legislation;

• the issues with the new legislation;

• the effective date and concerns with the Department of Finance release indicating a January 1, 2022 start date; and

• expectations for adjustments to the legislation.

Tax relief for family business transfers: A legislative fiasco – Part I

Tax relief for family business transfers: A legislative fiasco – Part II

* Allan Lanthier has held leadership roles in national tax-focused organizations, has been an advisor to both the Department of Finance and CRA, is a retired partner with an international accounting firm, and is a frequent contributor to the National Post and Globe & Mail.

Watch! Discussion with the author of King of Main Street (recorded from an audio session on the Clubhouse phone app)

Watch! Discussion with the author of King of Main Street, Peter J. Merrick, BA, FMA, CFP, TEP, FCSI, DTM, and Joseph R. Devaney CPA, CA.

Book synopsis:

When Michael meets Harold in what he thinks is a chance encounter in downtown Chicago, this young, cocky entrepreneur has no inkling of the journey of self-discovery and growth he is about to embark on.

This quest occurs over the course of several decades, after Harold takes Michael under his wing. Harold has been crowned “The King of Main Street,” a title he has rightfully earned as one of the most successful businessmen to ever walk the earth. Harold instructs his protégé about the most valuable discoveries, insights and lessons he has learned during his life’s journey. In turn, Michael learns what it takes for true success in living, business, mentorship and succession. Harold shows Michael that it is important in life to leave a worthy legacy. But Harold also has much more in store for him than Michael could ever have imagined.

Recorded:

May 3, 2021, from an audio presentation in the Canadian Tax Club on the Clubhouse phone App.

This video is for general information purposes only and deals with dynamic, time-sensitive and complex matters that may not apply to particular facts and circumstances. The information provided should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. For more information visit videotax.com/disclaimer. ©Video Tax News Inc. 2021, All Rights Reserved.

CEWS FAQ Updated

On July 2, 2021, CRA updated their CEWS FAQ. The key updates include:

1. What is the Canada Emergency Wage Subsidy? Updated: July 2, 2021

The following key component has been added:

For periods 14 to 16 (from March 13, 2021 to June 5, 2021), the rules related to the wage subsidy will remain essentially the same as for periods 11 to 13, except that an additional alternative baseline remuneration period is available. In particular, an eligible employer would be allowed to elect to use for periods 14 to 16, the period of March 1, 2019 to June 30, 2019, or July 1, 2019 to December 31, 2019, to calculate the baseline remuneration for its eligible employee (see Q18).

For periods 17 to 20 (from June 6, 2021 to September 25, 2021), the rules related to the wage subsidy will remain essentially the same as for periods 14 to 16 with the following changes:

• A revenue reduction of greater than 10% will be required to be eligible for the wage subsidy for periods 18 to 20 (periods beginning after July 3, 2021) (see Q5-01).

• The maximum combined wage subsidy will gradually reduce from a maximum of 75% for period 17 to a maximum of 20% for period 20.

• For period 18 and later, an eligible employer may elect to use the period from July 1, 2019 to December 31, 2019, to calculate the baseline remuneration for its eligible employees (see Q18).

• The wage subsidy for employees on leave with pay would continue to be available until the end of period 19 (August 28, 2021), i.e., wage subsidy for employees on leave with pay will not be available for period 20 (see Q20-02).

5-02. Can an eligible employer qualify for the wage subsidy if it does not have a revenue reduction in a claim period? Updated: July 2, 2021

For claim periods 5 to 17, if an eligible employer has not experienced a reduction in revenue for a particular claim period, it may still qualify to claim the wage subsidy in the particular claim period if the deeming rule (see Q5-03) applies, or for periods 5 to 10, if it is eligible for top-up portion of subsidy (see Q20-3).

For claim periods 18 to 20, an eligible employer must have experienced an actual reduction in revenue greater than 10% for a particular claim period, or have a reduction in revenue greater than 10% as calculated per the deeming rule that is applicable to claim periods 5 to 20 (see Q5-03).

5-03. What is the deeming rule for claim periods 5 to 20?Updated: July 2, 2021

The following key component has been added:

For claim periods 18 to 20, an eligible employer will need to have a reduction in revenue greater than 10% to claim the wage subsidy. For example, an eligible employer’s actual reduction in revenue for claim period 18 (current claim period) was 6% while the actual reduction in revenue for claim period 17 (the immediately preceding claim period) was 12%. Because of the deeming rule applicable to claim periods 5 to 20 applies, its reduction in revenue for claim period 18 will be considered to be 12% instead of 6%. Since the reduction in revenue is greater than 10%, the eligible employer will be able to claim the wage subsidy for claim period 18. If the actual reduction in revenue for period 17 was only 8 %, its reduction in revenue for period 18 will be deemed to be 8%. However, since the deemed reduction in revenue for claim period 18 is not greater than 10%, the eligible employer’s wage subsidy amount for that period will be nil.

28-2. What is the executive compensation wage subsidy repayment rule? New: July 2, 2021

The executive compensation wage subsidy repayment rule is a requirement imposed on certain eligible employers (see 28-3) to repay any or all of the wage subsidy they were refunded in respect of active eligible employees (i.e., other than employees on leave with pay - see Q20-03) for claim period 17 and subsequent claim periods if its aggregate compensation for specified executives (see Q28-6) during the 2021 calendar year exceeds its aggregate compensation for specified executives during the 2019 calendar year.

28-3. Which eligible employers are subject to the executive compensation wage subsidy repayment rule? New: July 2, 2021

An eligible employer will be subject to the executive compensation wage subsidy repayment rule if:

• its shares of capital stock are listed or traded on a stock exchange or other public market, or it is controlled by an eligible employer, the shares of capital stock of which are listed or traded on a stock exchange or other public market (referred to as the public parent corporation); and

• it has an executive compensation repayment amount (see Q28-4).

28-4. How is the executive compensation repayment amount calculated? New: July 2, 2021

An eligible employer’s executive compensation repayment amount is the amount determined by the formula A x B, where:

• A is:

  • the percentage assigned to the eligible employer under an agreement (see Q28-5); or

  • in any other case, 100% and

• B is the lesser of

  • the total of all amounts, each of which is a wage subsidy amount of:

    • the eligible employer;

    • the public parent corporation (see Q28-3),if any; and

    • each other eligible employer controlled in that period by the eligible employer or the public parent corporation, if any;

• for claim period 17 and subsequent claim periods received in respect of its active eligible employees; and

  • the amount, if any, by which the 2021 executive remuneration (see Q28-6) of the eligible employer—or of the public parent corporation, if any—exceeds such executive remuneration for 2019.

The amount of executive remuneration is determined with respect to the calendar year. In cases where the fiscal period of an eligible employer does not coincide with the calendar year, a proration of the fiscal periods that overlap the calendar year is required. This is based on the number of days in the fiscal period that fall within the calendar year.

28-5. What is the agreement for the purpose of calculating the executive compensation repayment amount? New: July 2, 2021

The agreement is relevant where there is a group of eligible employers that have wage subsidy amounts for the claim period 17 or any of the subsequent claim periods. For this purpose, the group of eligible employers comprises the eligible employer, the public parent corporation, and each other eligible employer controlled in that period by the eligible employer or the public parent corporation to the extent that they have a wage subsidy amount for claim period 17 or any of the subsequent claim periods.

The agreement allows the members of the group to determine how much of the total executive compensation repayment amount will be repaid by each of them. This agreement must be filed in a prescribed form, and must be entered into by each member of the group.

In order to ensure that the total executive compensation repayment amount is assigned, the agreement must assign a percentage (including 0%), in respect of each member of the group and, the total of all percentages assigned under the agreement must be 100%. No member of the group can be assigned a percentage that would create a greater repayment obligation than the total of its wage subsidy amounts for the relevant periods. Accordingly, where no agreement is made (for example, where there is only one corporation in the group that received the wage subsidy), the default percentage is 100%.

28-6. What is executive remuneration for the purpose of calculating the executive compensation repayment amount? New: July 2, 2021

Executive remuneration for the purpose of calculating the executive compensation repayment amount is a measure of executive compensation, based upon the amount determined for certain securities law purposes.

Where an eligible employer is required to make disclosures to shareholders under Canadian securities laws, its executive remuneration is the total amount of compensation that is required to be disclosed in its Statement of Executive Compensation for Named Executive Officers (i.e. form 51-102F6), pursuant to the Canadian Securities Administrators’ National Instrument 51-102, Continuous Disclosure Obligations. In general terms, this amount is the total compensation reported by the eligible employer for its Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executives (specified executives).

Where an eligible employer is not subject to the aforementioned disclosure requirement, but is required to make a similar disclosure to shareholders under the laws of another jurisdiction, its executive remuneration is the amount of total compensation reported in that similar disclosure (limited to the five most highly compensated individuals, if the compensation of more than five individuals is required to be reported under that disclosure).

In any other case, an eligible employer's executive remuneration is the amount that would be required to be reported by that eligible employer, if it were required to make disclosures to shareholders under Canadian securities laws (i.e. using the methodology for preparing form 51-102F6).

28-7. What is the mechanism to repay the executive compensation repayment amount? New: July 2, 2021

If an eligible employer has an executive compensation repayment amount, all or a portion of the amount of wage subsidy refunded on a particular date in respect of any of claim period 17 and subsequent claim periods is deemed to be an amount that was refunded to the eligible employer in excess of the amount of wage subsidy which the eligible employer was entitled to for the claim period (referred to as an excess refund). This excess refund is deemed to have become payable to the Receiver General on that particular date. It is calculated as the lesser of:

• The wage subsidy refunded on that particular date; and

• The amount determined by the formula A – B where:

  • A is the eligible employer’s executive compensation repayment amount (see Q28-4); and

  • B is the total of all excess refunds determined after the particular date.

This formula effectively provides an ordering rule, where later wage subsidy amounts are required to be repaid first, until the total of all excess refunds equal the eligible employer’s executive compensation repayment amount. See Example 28-7A.

BIll C-208, Intergeneration Business Transfers

On June 29, 2021 Bill C-208, which will significantly impact intergenerational transfers of businesses, received Royal Assent.

What does it do?

This Bill was intended to facilitate intergenerational transfers of qualified small business corporation shares (QSBC) and shares of the capital stock of a family farm or fishing corporation (both defined in Subsection 110.6(1)), by excluding these transfers to a corporation controlled by a taxpayer’s child or grandchild 18 years of age or older from the anti-avoidance rule in Section 84.1.  Section 84.1 can deem an individual who transfers shares of a corporation in which they have a significant interest to a non-arm’s length corporation, to receive a dividend as opposed to a capital gain.

To benefit from the proposals, Bill C-208 would require that the taxpayer must provide the Minister with an independent assessment of the fair market value of the subject shares and an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares.

In addition, other than in the case of death, where the purchaser corporation disposes of the subject shares within 60 months of their purchase, special rules apply.  In this case, the original vendor would be deemed to have disposed of the shares to the person who acquired them from the purchaser corporation (which, depending on the relationship with this person, may or may not cause a Section 84.1 issue).  The 60-month period would still be deemed to have commenced when the taxpayer originally disposed of the shares to the purchaser corporation.

This Bill would also reduce the limitations on the transfer of business assets between corporations owned by siblings.  Currently, siblings are deemed not to be related for the purposes of Section 55 and therefore, should siblings that are co-owners wish to part ways and separate the business on a tax-deferred basis, they will need to undertake a potentially complex butterfly reorganization (Paragraph 55(3)(b)).  This Bill would still deem siblings to not be related for these purposes.  However, it would add an exception such that siblings would not be deemed be unrelated (that is, they are related for this purpose) where a dividend was received or paid in a series of transactions by a QSBC or family farm or fishing corporation (defined in Subsection 110.6(1)).  This will allow for a simpler reorganization between siblings (Paragraph 55(3)(a)).

When is it effective?

Bills that do not indicate a coming into force date become effective at the end of the day immediately before Royal Assent was obtained (Paragraph 6(2)(a) of the Interpretation Act).  As no coming into force date was included in the Bill, it appeared that it would have been effective June 29, 2021.

However, on June 30, 2021 the Department of Finance issued a news release indicating that legislation would be introduced to clarify that the amendments will become effective on January 1, 2022.  This means that, while the changes are currently technically law, changes will be made which will eliminate the benefits of these provisions for any who undertook transactions to access them prior to January 1, 2022.

Further changes to the legislation?

The June 30, 2021 release also included the phrase “[t]he federal government is committed to facilitating genuine intergenerational share transfers, while preventing tax avoidance that undermines the equity of Canada’s tax system.”  Many practitioners have postulated that the combination of this phrase with the delay in effective date is an indication that further changes may be coming to adjust or modify the legislation.  There have been concerns expressed that, especially since the Bill was not drafted by the Department of Finance, there may be technical glitches, and that the breadth of the wording may allow transactions that were not intended.

Video Tax News will be monitoring for any developments on this topic.   Monthly Tax Update subscribers may wish to review articles in issues 464(9) and 411(9) for more information on how Section 84.1 works.

We will be covering whatever new details arise, and planning possibilities, in our fall Tax Update 2021 seminar series.