Federal Budget 2022: Announcements relevant to family owned businesses and farms

Federal Budget 2022 has a couple of things relevant to family owned businesses and farms. One is an expansion of access to the low “small business deduction” tax rate on business and farm income of private corporations. Another is the announcement of a consultation process with Canadians before changes to the new “Bill C-208” rules (which are already law) are implemented.

Sean Rheubottom, B.A., LL.B., TEP

Business Tax Measures — Private Corporations

Bill C-208 Update: Genuine Intergenerational Share Transfers

Bill C-208, a Private Member’s Bill that received Royal Assent on June 29, 2021, amended section 84.1 of the Income Tax Act with the intention of permitting intergenerational business transfer in a tax-efficient manner. The rules now allow intergenerational transfers within families to be done the way unrelated people have been able to do them for many years. See my earlier article for an explanation of this welcome tax relief for family owned businesses and farms.

Because the rules in Bill C-208 was not subject to the usual drafting process, there are some technical deficiencies that may allow abusive “surplus stripping” transactions that don’t have anything to do with family business or farm succession planning. The Department of Finance had to accept that the new rules are law, but announced that the rules would be revised by November 1, 2021, or when the amendments were ready whichever came later.

Regarding Bill C-208, the following update was provided by the government in the Supplementary Information to Budget 2022:

The Income Tax Act contains a rule to prevent people from converting dividends into lower-taxed capital gains using certain self-dealing transactions—a practice referred to as “surplus stripping.” Private Member’s Bill C-208, which received Royal Assent on June 29, 2021, introduced an exception to this rule in order to facilitate intergenerational business transfers.

However, the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place. Budget 2022 announces a consultation process for Canadians to share views as to how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers. The government is committed to bringing forward legislation to address these issues, which would be included in a bill to be tabled in the fall after the conclusion of the consultation process. The Department of Finance is interested to hear from all stakeholders, and will engage directly with key affected sectors, in particular the agriculture industry. Please send your comments. Comments should be received by June 17, 2022.

As announced in the July 19, 2021 News Release, in a Virtual Legal Publishers’ Technical Briefing (held shortlyafter Budget 2022 was tabled), Finance once again confirmed that pending revisions to ITA 84.1 will not applyuntil the date of publication of final draft legislation.

Increased access to the low “Small Business Deduction” tax rate

The first $500,000 of active business income of a Canadian-controlled private corporation (“CCPC”) and its associated corporations, combined, is subject to a low rate of tax known as the “small business deduction” (SBD). Currently in Saskatchewan the combine Federal and Provincial tax rate on such income is 9%, set to increase to 10% on June 30, 2022.

The Income Tax Act has rules that begin to reduce or phase out your corporation’s access to the SBD as the combined taxable capital employed in Canada of a CCPC and its associated corporations exceeds $10 million. The SBD is completely phased out by the time taxable capital exceeds $15 million.

Budget 2022 proposes to extend the range over which the small business limit is reduced. The new phase out range will be $10 million to $50 million instead of $10 million to $15 million.

This means that more medium-sized CCPCs will benefit from the small business deduction (“SBD”), and will increase the amount of active business income that can be eligible for the SBD. The amendment will apply to taxation years that begin after April 6, 2022.

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General information only; not intended as legal or tax advice. Readers are encouraged to obtain legal and tax advice before acting in their specific circumstances.