On July 18, 2017, the Department of Finance released a consultation paper, along with some proposed legislation, focused on tax planning using private corporations. The paper aims to target tax planning strategies that the government believes “inappropriately reduce personal taxes”.
The consultation period is 75 days and final legislation will be introduced shortly thereafter. In the meantime, the government is seeking public input on its proposals and deadline to submit feedback is October 2, 2017.
The new rules are complex. Further details will be revealed at a later time but the paper and legislation addresses these three key areas:
1. Income splitting prevention
Several measures have been introduced to eliminate the benefit of splitting income (dividends or capital gains) with family members (adults and children). The proposed changes will see the so-called “kiddie tax” provisions in section 120.4 of the Income Tax Act extend to apply to certain adult individuals, particularly where individuals do not directly contribute to the business in terms of labour or capital. Proposed legislation has been introduced with the intent that the changes will be effective January 1, 2018.
2. Conversion of dividend income to capital gains
Currently, there are existing measures in place to ensure most corporate distributions are taxed as dividends. However, there are some cases where corporate surpluses that would otherwise be distributed as dividends can effectively be converted to capital gains. The proposed changes introduced will eliminate this type of planning. Legislation has been introduced with an effective date of July 18, 2017.
3. Holding passive investments in private companies
The advantage that is targeted is the tax deferral corporations receive by having income taxed at the business rate (small business or general rate) and then investing in passive income generating assets. The government feels that the business tax rate is not meant for these types of investments and those corporations should effectively be put on the same level as a salaried employee who invests after-tax dollars to earn investment income.
The mechanism to achieve this is uncertain and no draft legislation was introduced on this point. Instead, several broad concepts were introduced and the consultation period is meant to choose between various alternatives.
The changes proposed will certainly impact many owners of private corporations across Canada. In light of the complex nature of the proposed changes to private company tax planning, we will monitor the progress of this consultation closely and offer further insights and guidance in the near future.
For a more in-depth discussion of how these proposed tax measures may affect your private business, please contact your Wolrige Mahon advisor.
By: Wolrige Mahon LLP