By RCCAQ

The issue of deducting capital gains when transferring a business to a family member is crucial to the future viability of brokerage firms and to regional economic vitality. Under Canada's Income Tax Act, small businesses are not entitled to claim an exemption if a business is sold between related persons. Even today, it is more cost-effective to sell your firm to a total stranger!

However, on February 6 and 8, Bill C-274 was given second reading in the House of Commons with a view to rectifying this situation. This gives us the ideal opportunity to provide you with an update.

Although this issue has been on the RCCAQ's agenda since the fall of 2014, it was not until June 2015 that the first developments took place: at that time, the federal MP for Bourassa, Emmanuel Dubourg, introduced Bill C-691, which aimed to rectify this major shortcoming in Canada's business transfer tax rules. Bill C-691 sought to eliminate the Income Tax Act provision that stipulated that gains from an "intergenerational" small business transfer could not be regarded as a capital gain, as they would be in the case of transfers between strangers.

Whenever a business is sold to a member of the same family, federal law treats the gain as if were a dividend (the tax rates for dividends range from 35% to 51%, depending on the province). In contrast, when unrelated persons enter the picture, the difference between the selling price and the initial purchase price is treated like a capital gain; this means that the beneficiary can claim a tax exemption on the first $824,176 (50% of the remaining capital is taxable, with the rate ranging from 47% to 58%, depending on the province).* Needless to say, business transfers between related persons are much less attractive than between non-related persons.

Elected officials are reluctant to recognize the unfairness

Following the elections in the fall of 2015, which brought the Liberals to power, Mr. Dubourg was appointed parliamentary secretary. Seeing as his new duties prevented him from introducing a private member's bill, this task was handled by Guy Caron, NDP MP for Rimouski, who went on to table Bill C-274. This legislation was debated in the House of Commons on February 6-8 but was unfortunately voted down (the Liberals opposed the measure).

We would like to point out that it is particularly disappointing that Mr. Dubourg's party, which had backed the initial legislation, did not maintain its position and ultimately did not back the proposal.

In Quebec, the provincial government recently addressed this issue, although the changes made do not apply to the brokerage sector. In its March 2015 budget speech, the government announced that it would ease the tax provisions for business transfers within a family, subject to certain criteria; however, this only applied to companies operating in the primary and manufacturing sectors (these changes took effect in 2016).

What a paradox for the insurance sector, which is desperately seeking new blood to manage brokerage firms in the future!

The RCCAQ will continue to speak out on this issue to ensure firms' future viability

Keep in mind that small and medium-sized businesses make up 67.5% of the brokerage sector; this means brokerage firms with one to four certified owners and/or employees (based on Raymond Chabot Grant Thornton's 2014 study on Quebec's brokerage insurance industry). The economic impacts of this unfair tax policy could be huge, particularly if firms are having difficulty meeting their staffing needs.

The RCCAQ thus has a key lobbying role to play. In a letter he sent to us on February 8, 2017 (the same day the legislation was defeated in the House of Commons), Mr. Dubourg stated that he had been given assurances by the federal finance minister (Bill Morneau) that the discussions would continue after the budget was tabled in order to find solutions to demographic challenges impacting the business succession process.

Therefore, it is our understanding that Mr. Dubourg remains an ally of insurance brokers at the federal level. The RCCAQ will keep on lobbying him as it maintains contacts with other relevant stakeholders with a view to moving forward with this issue.

At the provincial level, even though some encouraging steps were taken last year to ease the tax burden for the primary and manufacturing sectors, the brokerage industry is still being penalized. The next step for the RCCAQ will be to step up its lobbying efforts in order to obtain the same treatment for its members as we seek to ensure their future viability.