Canada: Private Corporation Announcements, October 16-20, 2017

Last Updated: January 16 2018
Article by Kim G.C. Moody

After a flurry of submissions—more than 21,000—to the Department of Finance regarding the July 18, 2017 private corporation tax proposals, the minister of finance made a number of announcements between October 16 and 20. These announcements are summarized below.

  1. Proposals to limit access to the lifetime capital gains exemption. The government announced that it was no longer moving forward with the measures that would have significantly limited access to the lifetime capital gains exemption. Does this mean that access to the exemption will be prevented vis-à-vis the new income-splitting proposals under section 120.4 if a taxable capital gain realized by a shareholder of a CCPC would fail the new reasonableness tests? At the recent Canadian Tax Foundation conference ("Tax Planning Using Private Corporations: Analysis and Discussion with Finance," held in Ottawa on September 25, 2017), a Department of Finance representative appeared to offer some clarity on this issue: he said that if access to the capital gains exemption was available before July 18, 2017, the exemption should be available after that time. We await details, but ultimately the reversal on this aspect of the proposals was welcome.
  2. Proposals to prevent surplus stripping. The broad scope of the surplus-stripping proposals came as a shock to many practitioners. When the government announced that it was no longer moving forward with the proposed changes to section 84.1 and new section 246.1, the news was welcomed.
  3. Proposals to limit income splitting. These proposals represented the bulk of the draft legislation that accompanied the July 18, 2017 materials. The draft legislation was overly broad and complex and was likely not workable in practice. The government announced that it was moving forward with the income-splitting proposals but that it would work to reduce the compliance burden with respect to ensuring that the reasonableness standards were met. The government also announced that it would release further guidance later in the fall. At the time of writing (mid-December 2017), no further material had been released by the Department of Finance. This absence of information is disappointing, since taxpayers should be given ample time to review material and plan their affairs prior to the implementation date of January 1, 2018. In my opinion, the government should change the implementation date to January 1, 2019, rather than rush to implement tax policy that taxpayers and their advisers will not have sufficient time to absorb.
  4. Proposals on the tax treatment of corporate passive income. The government announced that it was moving forward with the passive income proposals as generally outlined in the July 18, 2017 consultation documents (detailed draft legislation is to be released in the 2018 federal budget), with a few adjustments. First, all "past investments" and the income earned from those investments will be protected from the new regime (October 18, 2017). Second, a $50,000 de minimis threshold was established for passive income per year for which "no tax increase" was announced. Third, the government will work with the venture capital community to ensure that the proposed changes will not negatively affect them. This aspect of the announcement was very short on details and has given rise to many questions. For example, how will capital gains be treated in the computation of the $50,000 annual exclusion amount? How many new pools will have to be created in order to keep track of new regime versus old regime income? How will the grandfathering of existing assets work? Overall, the commitment to move forward on this aspect of the July 18, 2017 proposals is a disappointment for most tax practitioners. In particular, I worry about the behavioural consequences of affected taxpayers, since it is obvious to me that most of them will likely bend over backwards to avoid the very punishing aspects of these proposals if they ultimately become law.
  5. Reduction of the small business tax rate. The previous federal government enacted scheduled reductions (to an eventual 9 percent rate) to the federal small business income tax rate on the first $500,000 of active business income. In the 2016 budget, the current government cancelled the scheduled reductions, and the rate has remained at 10.5 percent. In October 2017, however, the government announced that reductions in the small business rate were being resurrected. The rates are now scheduled to change to 10 percent effective January 1, 2018 and 9 percent effective January 1, 2019. Increases to the tax rates of non-eligible dividends will also be adjusted. This announcement, in my opinion, represents politics at its worst. The July 18, 2017 proposals were never about the small business tax rates, and thus there is little doubt in my mind that the reduction was announced as a sweetener in return for some of the negative aspects of the proposals that remain.

The July 18, 2017 proposals were introduced, the government said, as measures necessary to improve the fairness of some of the rules relating to the taxation of private corporations. Between July and mid-October 2017, modified proposals were released. Significant concerns remain regarding the detail of the October version of the income-splitting amendments. Perhaps more importantly, many in the tax and business communities have expressed concern about the government's process in formulating and publishing serious tax policy proposals without significant private sector involvement. We should not adopt major tax policy changes in this manner. It is to be hoped that the government has listened to these concerns and will be open to private sector input in the policy formulation process when it considers future tax policy changes.

Originally published by Tax for the Owner-Manager, Canadian Tax Foundation.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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