Finance Department defies precedent, says it can delay law that eases tax burden for small businesses

July 08, 2021

PATRICK DOYLE/REUTERS

The federal Finance Department is asserting that it has the power to freeze a law passed by Parliament that gives more generous tax treatment to small businesses, in what experts are calling a break with parliamentary tradition and federal law.

The legislation received royal assent on June 29. But, in a news release issued the next day, Finance stated that the new rules won’t come into effect until Jan. 1, since no implementation date is spelled out in the bill.

The department’s stance that it can delay the onset of the new tax rules is unusual. It also defies federal law, which says bills go into effect when given royal assent unless otherwise specified, according to experts in legislative process and parliamentary procedure.

Transferring businesses between generations is becoming easier

The legislation, Bill C-208, reduces the tax burden on owners of small- and medium-sized businesses who want to pass on their companies to family members. It allows those business owners to claim proceeds from the sale of shares to an adult child or grandchild as capital gains, rather than as dividend payments. Capital gains are taxed at a lower rate, and in some cases a taxpayer can use a lifetime exemption to avoid paying any tax at all.

Conservative MP Larry Maguire, who sponsored the private member’s bill, says he was “flabbergasted” by the June 30 announcement by Finance. “I couldn’t believe it,” he said, adding that he is seeking an explanation from the department.

While 19 Liberals supported the bill, a large majority of the caucus voted against the measure, and the government did not support it.

The government has signalled its intention to legislate on the issue of intergenerational transfers, and in 2019 Prime Minister Justin Trudeau spelled out that policy direction in mandate letters to the finance and agriculture ministers. But the Liberals have not acted.

Dan Kelly, the head of the Canadian Federation of Independent Business, which has lobbied for the measure for years, said he was well aware that the Finance Department did not like the tax measures laid out in C-208. But, he said, he was still surprised by the attempt to delay its implementation.

“It’s quite outrageous that the government is turning its back on this,” Mr. Kelly said.

It’s the latest rough patch in the often rocky relations between small businesses and the Trudeau Liberals, with worries about tax avoidance and evasion yet again the spark. In the government’s first mandate, Bill Morneau, who was then the finance minister, proposed stricter rules for how small businesses claimed capital gains and distributed income between family members.

Stung by intense opposition, the government watered down its original proposals. The arrival of Chrystia Freeland as finance minister signalled a change in the government’s tone toward small business, at least until last week’s brief announcement by the Finance Department. Mr. Kelly has said that Ms. Freeland phoned him on her very first day as finance minister, a sharp contrast with his experience with Mr. Morneau.

In its June 30 news release, Finance said Bill C-208 did not specify an “application date” and that the Liberal government intends to introduce legislation that would clarify that the changes contained in the bill would apply as of Jan. 1.

Parliament is not scheduled to sit again until mid-September. If the bill’s implementation were delayed and there were an election, the next sitting of the Commons could mean a Liberal majority would be able to rewrite the small-business tax legislation to the government’s liking. (However, the bill was supported by a number of Liberals, including Wayne Easter, the chair of the Commons finance committee.)

Finance’s position that legislation needs a specific date to be enacted is a topsy-turvy interpretation of how the legislative process works in Canada, said Don Boudria, a former Liberal cabinet minister who is well versed in parliamentary procedure from his time as government house leader in the Chrétien era. It is a fundamental tenet of the legislative process that unless a specific date is enunciated, a bill takes effect on the day of royal assent, he said.

“Who knows what the Department of Finance is thinking about?” said Mr. Boudria, currently a senior counsellor at Hill & Knowlton Canada.

The Finance Department declined a request for an interview.

Mr. Boudria noted that the federal Interpretation Act is clear on the question. It states that “...if no date of commencement is provided for in an Act, the date of commencement of that Act is the date of assent to the Act.”

Former House of Commons law clerk Rob Walsh echoed Mr. Boudria’s assessment. “It’s not open to the government, in my view, to delay the implementation,” Mr. Walsh said.

And Mary Campbell, a retired senior public servant with expertise in legislative reform, said the Finance Department’s news release did not carry any legal weight in her view. “You might as well write a birthday card,” she said. “A press release is not law, it doesn’t have any force of its own.”

Finance officials had a sharp critique of Bill C-208 when they appeared before the Senate agriculture and forestry committee in mid-June, although the focus of their criticism was not the absence of a specific enactment date.

Then, Trevor McGowan, a director general at the Finance Department, focused his comments on what he described as a loophole that would allow small-business owners to transfer shares for the purpose of reducing their tax obligations, not for a genuine transfer of their business. Mr. McGowan said he had a “fundamental concern” that the legislation lacked safeguards, such as requiring the children or grandchildren purchasing shares to take an active role in the business or requiring owners to wind down their participation in the business.

Conservative Senator Carolyn Stewart-Olsen expressed her surprise at Mr. McGowan’s comments, saying in the committee meeting that it was the first time she had heard officials “tear apart” a bill passed by the Commons.

Mr. Boudria expressed similar concerns, saying it is up to Parliament to decide on laws. Even if those laws contain flaws, they are Parliament’s mistakes to make, he said, and the bureaucracy must defer to the legislature’s will. He pointed to a similar situation in 1989, when then-speaker John Fraser issued a ruling that admonished Finance for publishing information about the Goods and Services Tax before the measure had been approved by Parliament.

The speaker said in his ruling: “I expect the Department of Finance and other departments to study this ruling carefully and remind everyone within the public service that we are a parliamentary democracy, not a so-called executive democracy, nor a so-called administrative democracy.”