Department of Finance Proposed Changes for Canadian Entrepreneurs
On July 18, 2017, the Honourable Bill Morneau released significant proposed changes to the Income Tax Act. Owners of any corporation that has any of the following characteristics need to contact us for an appointment in the next two months to discuss the implications:
- Family shareholders that are not actively involved in the business that receive, or has planned to receive, dividends of the corporation; or
- Corporations that have business income that exceeds operational needs and invests in any form of investments, including inter-company investments.
These are important and significant changes that require immediate attention. 2017 may be our only calendar year to take any action that may reduce the impact.
Impact on Tax Planning
The changes affect the following three areas of tax planning used by private corporations.
1. Income Sprinkling
The proposed changes significantly expand the current rules targeting income splitting among family members.
Income Sprinkling proposed changes affect:
- Expansion of what is split income
- Reasonablity of income
- Adjustments to credits
- Capital gains deduction
2. Holding Passive Investments Inside a Private Corporation
The Government has discussed changing the rules to prevent the use of the corporate tax deferral to hold passive investments inside a corporation.
Proposed changes affect:
- Corporate tax on income retained in the company to fund passive investments
- Personal tax rate applied to investment income earned by a Canadian-controlled private corporation (CCPC)
3. Converting Income into Capital Gains
The Government has proposed new measures which seek to eliminate tax plans that convert dividend income into lower-taxed capital gains.