On July 18, 2017, the Department of Finance Canada released draft amendments to the Income Tax Act (Canada) and a discussion paper proposing significant changes to the taxation of private corporations in Canada (collectively, the “Proposed Tax Changes“). The Proposed Tax Changes seek to increase the tax paid by private corporations on investment income and also eliminate common tax planning arrangements for corporate shareholders. If implemented, the Proposed Tax Changes will negatively impact the way private corporations and their shareholders are taxed in Canada. We strongly recommend that you get familiar with the Proposed Tax Changes and how they may negatively affect your business and your family.
In summary, the three main focusses of the Proposed Tax Changes are as follows:
- Income Splitting – The Proposed Tax Changes will result in restrictions on income sprinkling to family members using a private corporation. Specifically, this change targets private corporations using different share classes or a family trust to split income among family members. A reasonability test will be implemented which will take into consideration the family member’s involvement in the business (labour contributions, assumed risk, etc.) when certain income is distributed to that family member (i.e. dividends).
- Higher Tax on Passive Investment Income – The Proposed Tax Changes will change the way passive investment income is taxed within a private corporation. These changes are intended to limit the benefits and neutralize the financial advantages of investments held within a private corporation.
- Restrictions on Capital Gains – In certain circumstances, corporate surplus can be converted into capital gains (lower-tax bracket) rather than being treated as a dividend (higher-tax bracket). The Proposed Tax Changes will prevent such conversion to capital gains and instead provide that such income be treated and taxed as a dividend.
It is likely that many of the foregoing terms sound familiar. Countless business owners have spent their time and money, together with their legal and accounting teams, planning and implementing a structure for their business to take advantage of the above benefits and rates currently available to private corporations. The Proposed Tax Changes have the ability to render the structures that have been so carefully implemented, and that have been proven successful for years, ineffective.
The Minister of Finance, Bill Morneau, has indicated that the Proposed Tax Changes are about fairness and that business owners should be treated (and, accordingly, taxed) just like salaried employees. However, there are significant differences between business owners and employees. Full-time salaried employees get sick days, employment insurance benefits if they lose their job, vacations, and other benefits such as pension plans and health insurance, with these benefits at least partly paid by the small businesses for which they work. If they lose their jobs and believe they weren’t provided with adequate notice, they can sue their former employers, a right which essentially provides employees with enhanced employment insurance coverage. Business owners and professionals, in contrast, have to provide for their own benefits and pensions, do not get sick or vacations days, and are not able to benefit from the employment insurance system if they lose their business. In addition, they bear the expense and pressures of running their businesses and the risk of losing their investment, which is why they have historically received a lower tax rate and other benefits.
Should you wish to read more about the Proposed Tax Changes, the following link will bring you to the Government of Canada’s website and provides links to each an overview, the consultation document and the draft legislation: http://www.fin.gc.ca/n17/17-066-eng.asp.
Please note that the consultation period for the Proposed Tax Changes closes on October 2, 2017. Accordingly, we encourage you to contact your Member of Parliament to share your views on the Proposed Tax Changes as soon as possible. The Department of Finance Canada is also inviting written comments on the Proposed Tax Changes until October 2, 2017 at the following electronic address: email@example.com.
For your ease in responding to these extensive and severe proposals, attached please find a template letter in Word format. Please feel free to use the attached template as a base for your written submission by affixing your letterhead and outlining your comments and concerns thereon.
While we have maintained a fairly neutral and professional approach in our template letter, we encourage you to passionately voice your concerns. You have the opportunity to ensure your story is represented and that the sacrifices you and your family have made continue to be recognized. It is with such passion that traction is made and that our voices, as business owners, are heard. You may even wish to indicate your intent to vote (or not vote) a certain way if the Proposed Tax Changes proceed.
We strongly believe that our country will suffer irreparable harm if the Proposed Tax Changes are implemented. Again, we ask that you please join the discussion by providing a written submission to the Government using one of the methods above. We truly hope that an abundance of negative and warranted response will persuade the Government to repeal the Proposed Tax Changes in their entirety.
Please note that the importance of sharing your voice on this issue is even more pressing given that the British Columbia Provincial Government just raised the corporate tax rate and rate for the top personal tax bracket.
The information provided above is of a general nature and has been provided as a courtesy. While we have strived to ensure the information contained herein is accurate and has been obtained from reliable sources, the content of this Article should not be acted upon without prior consultation with your professional advisors.
If you would like to further discuss the Proposed Tax Changes, please contact your tax advisor or one of our corporate lawyers.