Update on Certain Income Tax Proposals Impacting Private Corporations and their Shareholders

November 27, 2017 Published by

On October 16, 2017 the Federal Government announced a number of proposed changes affecting
small business corporations.

First, the small business tax rate will be reduced from 10.5% to 10%, effective January 1, 2018 and to 9%, effective January 1, 2019.

Second, the government intends to proceed with the proposed income sprinkling rules, although with some simplification to the original proposals. The announcement included a promise that the income sprinkling rules would not impact businesses where there are clear and meaningful contributions by spouses, children and
other family members. The government indicated that they will introduce reasonableness tests for
adult family members between 18-24 and for those 25 and older. There was no clarification on
how the income sprinkling rules would be implemented, however, these proposals will still be
effective January 1, 2018.

Third, they will not be proceeding with the proposed measures to limit access to the Lifetime Capital Gains Exemption. Please refer to our prior article on the original proposals.

On October 18, 2017, the Federal Government announced how they intend to proceed with changes to the taxation of passive income earned in a private corporation. Many taxpayers and advisors viewed this proposal as the most controversial of the July 18, 2017 consultation paper.  The government indicated that the rules will include a safe harbour amount, such that passive income of up to $50,000 will not be subject to the increased taxes. Other than announcing the $50,000 threshold, the government did not provide details into the operational nature of the rules. The $50,000 threshold is supposed to allow small business owners to hold savings for multiple purposes such as sick leave, parental leave, an economic downturn or retirement. These new rules are prospective and will apply to new investments only. Therefore, income earned on existing assets will not be affected. Draft legislation is anticipated as part of the 2018 Federal Budget Currently, there is no indication as to when these new rules will be effective.

The final announcement came on October 19, 2017 when the government stated that it will not be moving forward with its proposed measures relating to the conversion of income into capital gains. These proposals caused significant concern throughout the tax community, primarily due to their unintended consequences. The government will continue to develop new proposals to eliminate surplus stripping. They are aware of the need to accommodate intergenerational transfer of businesses in any new proposal, yet protect “the fairness of the tax system”.

These announcements followed three months of criticism from small business owners, farmers, doctors, other professionals and the tax community. Perhaps the Federal Government should have consulted the business and tax community before releasing their July 18th consultation paper. One would think that the original proposals were politically motivated as the government had to quickly backtrack on these flawed and unpopular initiatives.

Please contact us if you have any comments or questions concerning the above proposals.