Why family businesses deserve a fairer tax system


Bill C-208 could increase the survival rate of Canada’s economic engine – small and medium-sized family businesses.

Canadian farmers and small and medium-sized family business owners are breathing a little easier after Bill C-208 – legislation that would create a level playing field on business transfers within families – passed its second reading in parliament last month.

Under current tax law, family business owners are penalized when they sell their business to a family member. For example, selling their business or farm at fair market value to a third party allows owners to use a capital gain exemption of $1 million on the sale, resulting in a 13.39% tax rate.

If selling to a son or daughter, the sale is recorded as a dividend (the difference between the sale price and the original purchase price) rather than a capital gain, and subject to a 47.4% levy, a 34-point difference. The resulting tax penalty hinders family business longevity and creates unnecessary hardship for communities who rely on such enterprises for economic resilience.

Small and medium-sized family business owners don’t understand why they are treated unfairly, and this burden threatens their survival. Many baby boomers are counting on the sale of their business to finance their retirement.

Levelling the playing field

Introduced by Manitoba Conservative MP Larry Maguire, Bill C-208 will allow small businesses, farm families, and family fishing corporations the same tax rate when selling their enterprise to a family member as they would when selling to a third party.

Small and medium-sized family-owned enterprises are a potent force in Canada’s agriculture sector where they account for 80% of all SME GDP, according to the Conference Board of Canada.

Indeed, family-owned enterprises are the most powerful driver of economic growth in Canada, employing 6.9 million people nationally or 47% of all private sector employment. In 2019, they generated $574.6 billion in private sector GDP.

“Family-owned enterprises generate nearly half of Canada’s private sector GDP. They are a critical component of our economy,” says Family Enterprise Foundation President and CEO Bill Brushett.

It is imperative that policymakers recognize their economic importance and work towards an equitable tax system, one that enables – not hinders – family-ownership and enterprise longevity.

Business transfers to NextGens have major implications for Canada’s economy. Nearly 75% of small business owners intend to exit their enterprise by 2028, representing a potential wealth transfer of $1.5 trillion. Almost half want their children to take over the business.

Maguire says the bill will allow for sustainable business and farm succession, secure the retirement savings of business owners who choose to sell their operation to a family member, and local enterprises to flourish with fewer unfair taxes.

Economic resilience relies on business continuity

“It is completely unacceptable that it’s more financially advantageous for a parent to sell their small business or farm to an absolute stranger than it is to their children,” Maguire says.

He has a point. Given what business owners have been through in the past year, the tax reform could be a lifeline.

The bill has the support of the Milk Producers of Quebec, Chicken Farmers of Canada, the Canadian Federation of Agriculture, the Taxpayers Federation of Canada, Conference for Advanced Life Underwriting, the Society of Trust and Estate Practitioners, Family Enterprise Foundation, and the Canadian Chamber of Commerce.

Looming federal election

It is unclear when Bill C-208 will come up for third reading, or whether parliament will last long enough for it to come up.

Let’s hope next week’s federal budget contains elements of fairness that support small and medium-sized family enterprises – the backbone of Canada’s economy.

Discover Your Learning Journey

Take the Learning Discovery Assessment