There has been a lot of buzz in the media lately about the draft legislation released by the Department of Finance on July 18, 2017. It’s our belief that if this legislation is passed in its current state, it will significantly impact the taxation of owner-managed businesses and their family members – a demographic that makes up 95% of our client base. Since the technical nature of the legislation is somewhat complicated, the team at Zeifmans decided to send out a series of educational newsletters to assist you in understanding the proposed changes, and how your business could be affected.
As we mentioned in previous e-newsletters, this is a time-sensitive topic. The Department of Finance is considering submissions until October 2, 2017. Following this consultation period, submissions will be taken into consideration and the legislation will be revised for formal release.
Though it’s somewhat early to report on the specific tax measures proposed in the draft legislation, in this series we plan to report on the four broad areas of concern that the Department of Finance has attempted to address. Today, we’ll begin by examining the holding of passive investments through a private corporation.
First Area of Concern: Holding Passive Investments through a Canadian-Controlled Private Corporation (“CCPC”)
The Income Tax Act provides tax incentives for earning business income through a corporation, rather than doing so personally. For example, Ontario residents are currently taxed at 53.53% on income over $220,000 earned within a calendar period. On the other hand, a CCPC doing business in Ontario is taxed at 15% on the first $500,000 of annual business income, with any excess earnings being taxed at 26.5%.
Obviously, the difference in the level of taxation provides corporations with significantly more funds for passive investment than individuals, and it is this inequity that the Department of Finance is seeking to address.
Though the draft legislation on this topic has not yet been released, the Department of Finance signaled its intention to increase the level of taxation on investment income earned by a corporation, where it can be traced to reinvested business earnings. If such measures are enacted, the combined level of corporate and personal taxation of such investment income will increase from approximately 56% to as much as 73%!
This system will not only be inequitable to owners of CCPC’s, but it will also be difficult to administer, necessitating the categorization of retained earnings into three different baskets.
If these measures are enacted, we predict the following challenges for our CCPC clients:
- Increased costs, in order to deal with this added level of complexity; and
- More disputes with the Canada Revenue Agency, because it will be virtually impossible to establish and track these three baskets with any level of certainty.
Ultimately, these measures simply force successful business owners to pay dividends to themselves prematurely, in order to avoid the higher rate of taxation that could apply if the corporation reinvests its money in investment assets. While undoubtedly this will raise significant tax revenue to the Canadian federal and provincial governments in the short-term, we predict that these tax measures will cost the Canadian economy in the long-term, since personal wealth and the availability of capital will prematurely deteriorate.
Stay tuned tomorrow for part two in our 4-part series, when we’ll examine the second area of concern: Income Splitting.
For more information on this topic and CCPC, contact your Zeifmans advisor or reach out to us at 416.256.4000 or email@example.com.
Part 2: Income splitting
Part 3: The enhanced capital gains deduction (“ECGD”)
Part 4: The conversion of income into capital gains
Federal Government tax changes announced Oct 16
Oct 18 and 19 updates on the taxation of owner-managed businesses
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