Thank you very much. It's a pleasure to be here today to appear before the committee on Bill C-208.
This is a bill to help small businesses, but before I get into that, I just want to thank you as the chair and the committee for meeting today during a constituency week and for allowing us to bring this important bill forward, which many in several industries are supporting across the country. All parties, from what I understand, support this as well. The opposition and some of the members of the governing party voted for this at second reading. I'm very pleased to be able to present it today. I have some others to thank later on as well.
To start off today, this bill gives us an opportunity to work together to champion the causes of those whose time has come, I guess you could say. I want to thank as well Mr. Guy Caron from the NDP. He was formerly the interim leader of the NDP, and this was his bill when it was presented to the House previously. I was able to pick it up because of the draw that comes out of parliamentary procedure, and to bring it forward word for word, basically, to make sure there is support to help small businesses, farming businesses and the fishing industry with qualifying shares. I want to thank Mr. Caron particularly in regard to this.
The essence of the bill is pretty straightforward. Bill C-208 will allow small businesses, farm families and fishing corporations to have the same tax rate when selling their operation to a family member as they would have when selling to a third party. Currently, when a person sells their small business to a family member, the difference between the sale price and the original price is considered a dividend. If it is sold to a non-family member, that is considered a capital gain. That's a pretty straightforward fact. That capital gain is taxed at a lower rate and allows the seller to use the lifetime capital gains exemption. Therefore, it's completely unacceptable that it's more financially advantageous for a parent to sell their farm or small business to an absolute stranger than it is to sell it to their own family, to their own children, son, daughter or grandchildren.
I want to give two specific examples of how this legislation will help families transfer their operations when they decide to make that transition.
I can imagine a bakery that a couple has operated for 30 years. They're now ready to retire, and another company has reached out to indicate that it would like to purchase it from them. However, their daughter has indicated that she wants to take over the family business. In many cases, family members have worked in these businesses and helped them survive and flourish and continue as family businesses.
As is the case for a lot of small business owners and farmers, they couldn't afford to put large sums of money into their RRSPs or savings vehicles as any extra money was reinvested back into the business. This couple, then, will rely on the sale of the bakery to fund their retirement. They call up their accountant to start the conversation about different planning scenarios. The accountant tells them that if they sold their bakery to the other company rather than to their daughter, they would have an effective tax rate of 10%, using their lifetime capital gains exemption. However, the accountant also tells them that if they sold the bakery to their daughter, they would be obliged to repay their loan with personally taxed dollars.
This represents a significant penalty compared to what they would pay if they sold their bakery to the other company, as the effective tax rate would be quite a bit higher, significantly higher. With this information in hand, they have a family huddle and discuss the options. The couple is now seriously considering selling the business outside of the family as they do not want to burden their daughter with a tax obligation that will inhibit her ability to make a living and grow the business successfully as they've done over the years they have run it.
With regard to the shares of the sale of the bakery, in a perfect world this couple should be indifferent to whether they are sold to their daughter or to the other company. Their daughter would not be penalized for purchasing shares from her parents and should be able to fund the purchase with corporate funds as she would if she were to purchase the business from an unrelated party.
If this change were made, it would allow the next generation to become business owners and to keep the ownership of the business local or in the family.
With Bill C-208, we can fix this injustice once and for all. Right now, many of our entrepreneurs are struggling, particularly in this pandemic. It has been one of the most disruptive forces in our lifetimes. Across the country, no community is immune from its impact.
Those entrepreneurs who are listening from where they are run their own businesses. They understand the massive responsibility and stress that come from being the risk-takers, but the legislation we have before us today sends the message to those family-run businesses out there that no longer will it be more financially advantageous to transfer your business or your farm to a stranger rather than to your own child because of tax purposes.
The other example I want to give is that of a farmer who is set to retire in the next couple of years and is reviewing various succession options. The farmer wants his son to take over; however, he wants fair market value for his farm in order to fund his retirement. If a third party were to ask the farmer to purchase the shares of his farming company, the purchaser would have the ability to purchase the shares through the corporation.
Selling the farm to this third party would allow the farmer to use his farm capital gain exemption of $1 million on the sale, resulting in a 13.39% effective tax rate, but if a farmer sold his farm to his son, the sale would be recorded as a dividend, rather than a capital gain, on which the farmer would pay 47.4% in tax. That's 34% more tax, Mr. Chair. I think we can all agree that it is completely unfair for the tax rate to be significantly higher when the farmer sells his operation to his son rather than a third party—in many cases, a complete stranger, as I pointed out before.
Bill C-208 sends a message of hope to young farmers out there who want to carry on what their parents started. There's something special about being connected to the land and to reap what you sow, as there is any small business an attachment, not just in farming and fishing, Mr. Chair.
In Manitoba and other provinces, there are century farms, which celebrate farm families who maintain continuous production for over 100 years, with many of them now over 125 years old. I've attended many of those century farm celebrations, as I'm sure many of my rural colleagues have who are on the committee and in Parliament. You can tell in the faces of the family members how important that milestone is to them.
Farm families face unique pressures in succeeding their operations, including the increasing cost of land, the average age of farm operators and the capital requirements for those entering the industry. The passage of this bill will eliminate the unfair tax rates that make it difficult to keep the farm under family ownership.
Mr. Chair, in closing, I want to also say that I am asking the members of the committee today to consider the importance of making sure that we are able to help small businesses across the country, all those who have eligible shares, and to make sure that they can transfer these operations into the next family. It's not every business that will choose to do that, but it is quite a significant opportunity for families to invest in their own futures and to make sure, with pride, that their families can continue to build on what they have put so much of their heart and soul into over their lifetimes.
In closing, I want to say as well that I thank Mr. Caron and you for allowing this to go forward today, and also Mr. Waugh, from Saskatoon—Grasswood, who allowed me to do my second hour on second reading in early February so that we could get to this point with this bill in today's committee meeting. With that, I would urge my colleagues on the committee to look at allowing this bill to move forward and back into the House for third reading.
Thank you, Mr. Chair.