Federal Government New Taxation Changes Announced October 16th, 2017
In our recent 4-part series, we took an in-depth look at how the Department of Finance’s proposed legislative changes could affect Canadian business owners. In particular, we discussed how the new taxation could influence Passive Investments, Income Splitting, the ECGD, and Capital Gains.
On October 16th, 2017, Finance Minister Bill Morneau announced the Liberal government’s latest position on the taxation of small businesses, following the end of the consultation process related to the release of its July 18, 2017 draft legislation. It has been widely reported that the government received nearly 21,000 submissions – the vast majority of which were highly critical of its proposals.
The first area of concern we had discussed was in regards to the taxation of passive investments held by a Canadian controlled private corporation (“CCPC”) – watch the video. Yesterday’s announcement by the Finance Minister did not provide specifics on how this area will evolve. That said, the release on the Department of Finance’s website indicated that Canadians raised significant concerns, since passive investments are often used by business owners to manage personal income risk in the case of an economic downturn or changed circumstances such as sick leave or parental leave. In addition, passive investments held in a CCPC are also used as a retirement planning tool for business owners, because other savings vehicles such as RRSPs are not sufficiently flexible and adaptable to address business volatility.
The second area of concern we had discussed was in regards to income splitting. The government indicated its intention to proceed with measures to limit income splitting, while ensuring that the rules will not impact businesses to the extent there are clear and meaningful contributions by spouses, children, and other family members. Such persons will have to demonstrate their contribution to the business through any combination of the following four criteria: (i) labour contributed; (ii) capital or equity contributed; (iii) financial risks assumed; and (iv) past contributions in respect of previous labour and capital or risk assumed. The government announced that it will seek to simplify the compliance burden to establishing the contributions made by spouses and other family members, in order to ensure that a greater level of certainty is attained with respect to these proposed measures. The government also announced that the revised legislation will also address double taxation concerns raised during the consultation process.
The third area of concern we had discussed was in regards to the lifetime enhanced capital gains deduction (“ECGD”). The government indicated that the consultation process identified unintended consequences associated with the proposed measures, such as the potential impact on the intergenerational transfer of businesses. Based on this feedback, the government will not be moving forward with measures that limit access to the ECGD.
The final area of concern was in regards to the conversion of income into capital gains. As with the first area of concern, the Finance Minister did not provide specifics on how this area will evolve. That said, the release on the Department of Finance’s website indicated that Canadians raised significant concerns that the foregoing measures could impair estate planning and the transfer of farms and small businesses to the next generation.
As a form of olive branch in the wake of these negative income tax proposals, the government affirmed its support of small business by lowering the federal small business tax rate for CCPCs. Presently, the first $500,000 of annual business income earned in Canada is taxed at rate of 10.5%. This rate will be reduced to 10% effective January 1, 2018, and will be further reduced to 9% effective January 1, 2019.
For more information or to discuss your current tax situation, contact your Zeifmans advisor today, or reach out to us at 416.256.4000 or firstname.lastname@example.org.
Part 1: Passive Investments
Part 2: Income splitting
Part 3: The enhanced capital gains deduction (“ECGD”)
Part 4: The conversion of income into capital gains
Oct 18 and 19 updates on the taxation of owner-managed businesses
Not on our mailing list? Sign up today to stay up to date on the Department of Finance’s draft legislation and other related news.