Canada’s Private Corporation Tax Proposals: Year End Planning in the Face of Uncertainty
Published:
November 20, 2017
Author(s):
October 2, 2017 marked the end of the consultation period relating to the taxation of private corporation proposals the Department of Finance (Canada) released on July 18, 2017. The government received over 21,000 written submissions during the consultation period. Since the consultation period ended, the government has made a series of announcements about its July 18, 2017 proposals. Although these announcements are welcome changes to the initial proposals, much uncertainty remains. However, there may still be tax planning steps that private corporations can implement in 2017 to best position themselves for the pending changes, even in the face of this uncertainty.
THE ANNOUNCEMENTS
After the consultation phase ended, the government released a series of announcements about its proposals:
October 16, 2017. The government announced that it will:
- Not proceed with the proposed measures to limit access to the capital gains deductions.
- Simplify the proposed measures to limit income sprinkling, so that these measures will not affect spouses, children and other family members who make clear and meaningful contributions to the business.
- Lower the small business tax rate to 10% on January 1, 2018 and to 9% on January 1, 2019.
October 18, 2017. The government announced it will proceed with measures to limit the tax deferral opportunities relating to passive investments, and will release draft legislation relating to passive investments as part of Budget 2018. The government stated these measures will:
- Allow past investments, and the income from those investments, to be protected.
- Allow businesses to save for contingencies or future investments in growth.
- Create a $50,000 annual threshold on passive income.
- Have incentives to ensure venture capital and angel investors can continue to invest in Canadian innovation.
October 19, 2017. The government announced it will not proceed with the proposed measures relating to the conversion of income into capital gains. It also announced that in the coming year it will develop proposals to better accommodate intergenerational transfers of businesses.
October 24, 2017. In the Fall Economic Statement delivered on October 24, 2017, the government confirmed it will release revised income sprinkling legislation later in Fall 2017.
THE REMAINING UNCERTAINTY
These announcements are welcome changes to the initial proposals, but much uncertainty remains although there may still be tax planning steps that private corporations can implement in 2017 to best position themselves for the pending changes:
Income Sprinkling. It is unclear how the government will simplify the income sprinkling proposals. The October 16, 2017 announcement indicated a reasonableness test will remain part of the final legislation. There is speculation spouses may be excluded from the final income sprinkling restrictions, and the age limit may be fixed at age 24. It is also unclear whether capital gains will be excluded from the income sprinkling measures if they are eligible for a capital gains deduction, although this seems a reasonable inference from the government’s announcements. Taxpayers must await the Fall 2017 final legislation for answers to these questions. In the meantime, taxpayers should begin seeking professional advice as to the steps they should be considering before the end of 2017, such as ways to maximize distributions to family members at available marginal rates.
Passive Investment Rules. There is also uncertainty as to the details of the final passive investment rules, which will not be resolved until 2018. Until then, taxpayers should consult with their tax advisors to discuss the currently available information. There may be steps taxpayers can implement in 2017 to take full advantage of the anticipated grandfathering aspects of these measures.
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