On July 18, 2017, the federal Department of Finance released a discussion paper relating to anticipated changes affecting private corporations.
The discussion paper can be found at: http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.pdf. The Department of Finance is inviting the public to provide comments by October 2nd, 2017. Comments may be sent to firstname.lastname@example.org.
The anticipated amendments may bring significant changes to:
- Income splitting with family members:
Since 1999, the federal Department of Finance has eliminated any tax benefit on income splitting by imposing a tax on split income with children under the age of 18. The federal Department of Finance imposed the top personal tax rate dividends paid by private corporations, or income allocated through a partnership or a trust, to family members under the age of 18. The proposed changes, if passed will likely extend the tax on income split to certain adult individuals who receive split income. It will no longer be dependent on age. The federal Department of Finance also stated that they will introduce a “reasonableness test” based on the recipient’s labour and/or capital contributions. If these changes are implemented, the ability of business owners to split income with family members in a tax efficient way will be restricted.
- Holding passive investments inside a private corporation:
Currently, corporate income tax rates, which are generally lower than personal rates, facilitate accumulation of earnings that can be invested in a passive portfolio, most of the time as part of a retirement plan, drawing upon such retained earnings after retirement, the federal Department of Finance is now exploring how to limit the perceived benefit of investing after-tax income (excess earnings) inside a corporation to grow in a passive portfolio.
- The lifetime capital gains exemption:
Corporate owners often organize their business by including family members, to enable them to take advantage of the multiplication of the lifetime capital gains exemption. The federal Department of Finance’s proposed changes would limit or deny the use of the lifetime capital gains exemption in certain circumstances, where common planning strategies are implemented to multiply the lifetime capital gains exemption through a family trust or by having family members as shareholders in a corporation.
- Converting a private corporation’s regular income into capital gains:
Currently, anti-avoidance provisions apply when a sale of shares is made to a “non-arm’s length corporation”, such that an individual is not able to extract money from their corporation and trigger a capital gains deduction in order to pay no tax. Some corporate owners have taken steps to convert what would otherwise be taxed as salary or dividends into capital gains. This usually involves selling some shares to another company related to the shareholder. The federal Department of Finance proposes to close these opportunities by amending section 84.1 of the Income Tax Act (Canada). The proposed changes could cause issues for a business owner who wants to pass on his or her business to the next generation.
Such proposed changes, if passed, will have significant effects on incorporated businesses.
The planned implementation of any tax changes is said to take place in early 2018. Stay tuned and contact your business lawyer and accountant if changes pass to see if and how you are impacted.