Finance Climbing Down From Several Proposed Tax Measures
OCTOBER 23, 2017
Last week the Finance Department announced changes to the proposed legislation in response to 21,000 submissions including those from our firm, our clients, and many other similarly concerned taxpayers. Although some progress has been made we remain very concerned with the government direction of eliminating the tax benefits that entrepreneurs realize in exchange for the tax costs and risks they take on.
The revised rules will introduce a reasonableness test for payments to adult family members, which will be more stringent for those aged 18-24. The revised rules are expected to allow income to be split with adult children who currently or previously contributed to the business through labour, capital, equity, or financial contribution. These new rules will significantly impact many successful entrepreneurs.
Dividend planning for 2017 for low income family members should be carefully considered and potentially increased.
Related revised draft legislation is expected this fall with an effective date of January 1, 2018.
Lifetime Capital Gains Exemption
Based on the feedback received and identified potential unintended consequences, the government is not moving forward with any changes that limit access to the Lifetime Capital Gains Exemption. This will allow trusts and other structures used for intergenerational transfers to continue to work effectively.
Passive Income In Canadian Controlled Private Corporations
This is a crucial area as proposed changes will almost double tax on passive income that doesn’t qualify under an exception. Rates of tax will approach 75%!
The government advised that legislation would ensure all passive assets held by corporations before the change would be grandfathered, and would not fall under the new rules. There would also be a $50,000 annual passive income exemption so that, in the government’s view, a company would be able to have about $1M of passive investments and not be impacted by the proposed change.
Finance has also indicated that special rules will be developed to ensure that venture capital investments do not face the same disadvantages that they are proposing for other passive investments.
Finance’s release of information related to passive investing is so full of holes that it is impossible to have much certainty. For example it is clear that existing investment should realize no change to current tax rules. However what happens when those investments are sold and the funds reinvested is very unclear.
We are considering whether or not investment portfolios should be maximized and reoriented before the budget date.
The government noted that draft legislation would be introduced with the 2018 budget, and be effective at budget date. The exact impact of the changes, and how the exemption would work will not be clear until the draft legislation can be reviewed.
Converting Income into Capital Gains
The rules targeting so called “surplus stripping” will not be moving forward with the legislation. The government did note a desire “to develop proposals to better accommodate intergenerational transfers of businesses while protecting fairness of the tax system”. The government will consult with business, and may introduce revised legislation on the issue in the future.
Aside from these announced changes, the government also took the opportunity to announce their intent to reduce the small business federal corporate tax rate from the 10.5% current rate to 10% effective January 1, 2018 and 9% effective January 1, 2019. For a company with taxable income of $500,000, this would result in savings of a meagre $7,500 when fully implemented.
The government was also clear that although the consultation period is over, they are still soliciting and hearing feedback – so please let your voice be heard by contacting your local MP or e-mailing the Department at firstname.lastname@example.org.
At Rosenswig McRae Thorpe LLP, we have attended a number of meetings with MPs and we would be happy to attend any meetings with your local members.