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 “July Proposals“). The July Proposals seek to increase the tax paid by private corporations on investment income and also eliminate common tax planning arrangements for corporate shareholders. As summarized in our article of September 20, 2017, three of the most disconcerting points of the July Proposals were: (1) restrictions on the ability to income split among family members; (2) higher tax on passive investment income earned within a corporation; and (3) restrictions on the conversion of income into capital gains.
During the consultation period, we understand that the Government received over 21,000 submissions in response to the July Proposals. After the consultation period formally ended on October 2, 2017, the Government announced certain amendments to the July Proposals during the week of October 16, 20171 (the “October Announcements” and, together with the July Proposals, the “Proposals“). It is clear that our voices are making a difference and we applaud those of you who shared your story and set out your concerns to your Member of Parliament and The Department of Finance Canada during the consultation period.
As a brief summary, the October Announcements set out the Government’s intention to:
- Lower the federal small business tax rate to 10% effective January 1, 2018, and to 9% effective January 1, 2019;
- Simplify the proposed changes to income splitting;
- Not move forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption;
- In relation to the proposed measures concerning the way passive investment income is taxed within a private corporation:
- Ensure that all past investments and the income earned from those investments is protected; and
- Protect up to $50,000 per year of passive income in a private corporation; and
- Not move forward with the proposed measures relating to the conversion of income to capital gains.
Although the Government has abandoned or retrenched some of the July Proposals, the proposed changes that are moving forward remain problematic and will negatively impact the way private corporations and their shareholders are taxed in Canada. It is particularly concerning that the Government is pressing forward with the proposed changes relating to income splitting (despite the intention to simplify these proposals) as such changes will likely have the largest impact on family businesses.
We continue to be of the opinion that not only will the Proposals have a significant adverse impact on the Canadian economy, but will also be a pressing issue leading up to the next federal election.
Although the formal consultation period has come to a close, we encourage you to continue to reach out to your Member of Parliament to share your views and concerns regarding the Proposals. As mentioned above, it is clear that our voices are making a difference and we feel it is important to keep the conversation open.
The information provided above is of a general nature and has been provided as a courtesy to our corporate clients. This email has been sent to our contact on file so please feel free to share the information contained herein as you feel may be appropriate. While we have strived to ensure the information contained herein is accurate and has been obtained from reliable sources, the content of this email should not be acted upon without prior consultation with your professional advisors.
If you would like to further discuss the Proposals, please contact your tax advisor or one of our corporate lawyers.