Tax Group comments on Federal Government announcement of October 16, 2017

On July 18th the Liberal Government issued a consultation paper “Tax Planning Using Private Corporations” (the “Paper”).  Our previous posts comment on various aspects of the topics covered by the Paper.

https://www.cwilson.com/business-owners-tax-tax-reform-impact/

https://www.cwilson.com/private-company-tax-proposal-changing-landscape/

The Department of Finance reported that over 21,000 submissions were received during the consultation period that ended on October 2, 2017.

On October 16, 2017, Prime Minister Trudeau addressed the Government’s next steps at a press conference held at a restaurant in Stouffville, Ontario celebrating Small Business week. Minister of Small Business and Tourism Bardish Chagger also spoke. The Prime Minister took the opportunity to kick off what is apparently going to be a daily announcement of where the Government is headed as regards the proposed tax changes to private corporations.

At the same time, the Government issued 4 backgrounders:

Reducing the Small Business Tax Rate

Support for Small Business and Fairness for the Middle Class

Income Sprinkling Using Private Corporations

Support for Risk-Taking and Entrepreneurship

So, what did we learn?  Here are some of the key points raised in the Government’s release:

  • Consistent with its election promise, the Government intends to reduce the small business tax rate from 10.5% to 10% on January 1, 2018 and to 9% on January 1, 2019. The taxation of non-eligible dividends is also to be adjusted. The reduction in the rate will provide a private company with up to $7,500 in federal tax savings per year “that will be available for reinvestment”.
  • Only 50% of capital gains will continue to be included in income for tax purposes.
  • The regime governing income sprinkling will take effect January 1, 2018.
  • The income sprinkling proposal outlined on July 18th will be simplified so that businesses with family members who meaningfully contribute to the business will not be affected. The Government still intends to introduce reasonableness tests for adult family members aged 18-24 as well as those 25 and over. “These adults will be asked to demonstrate their contribution to the business based on four basic principles”:
    • Labour,
    • Capital or equity contributions to the business,
    • Taking on financial risks of the business such as co-signing a loan or debt, and/or,
    • Past contributions in respect to labour, capital or risks.

In doing so, the Government announced it will work to reduce the compliance burden with respect to establishing contributions of spouses and family members, and to better target the proposed rules and address double tax concerns.  Notably absent from the list of principles are (i) amounts paid previously to the shareholder; and (ii) a comparison to what an arm’s length person would have been paid.  Both principles were included in the draft legislation accompanying the Paper.

  • The Government is “not moving forward with measures that would limit access to the Lifetime Capital Gains Exemption”.
  • The unintended consequences arising out of the changes to surplus stripping and the effect on estate planning and inter-generational transfers have been heard.

The Government indicates that later this fall, it will release revised draft legislative proposals outlining the proposed changes.

In the meantime:

  • The Government is signaling that it has no intention to change the 50% capital gains inclusion rate.
  • The income sprinkling proposals will be modified but it is not clear how.
  • It is hoped that today’s announcements mean that the Government is not proceeding with any of these proposed measures dealing with the lifetime capital gains exemption. The July 18th paper contains a number of proposals including (i) no exemption for gains accruing while the shareholder is under 18; (ii) no exemption for gains accruing while shares are held by certain trusts; and (iii) no exemption in respect of gains subject to the tax on split income (or TOSI). Perhaps we will have more clarity this week.
  • Changes might be expected dealing with the provisions dealing with surplus stripping that have been effective since July 18th but it is not clear what those changes may be.

We will keep you posted as developments continue to unfold.