On July 18th, 2017 the Minister of Finance released a discussion paper and draft legislation to address three issues the government identified in Budget 2017. Specifically, the three noted issues were as follows:
- Sprinkling (splitting) income using private corporations,
- Holding a passive investment portfolio inside of a private corporation, and
- Converting a private corporation’s regular income into capital gains (i.e. surplus stripping)
The discussion paper proposes significant changes to the existing rules governing taxation of private corporations and individuals, and if enacted, will have a significant impact on our clients. The following are among the most significant:
Extension of the “tax on split income” (TOSI) rules
Currently, these rules are commonly referred to as “kiddie tax”; and impose the top personal tax rate on any split income received by that individual (53.53% in Ontario). These rules could be extended to also apply to adults receiving split income where the amount is “unreasonable in the circumstances”; a reasonability test is proposed to be introduced in the Income Tax Act based on the services provided and capital contributed by that individual. The types of income characterized as split income is also being expanded. These measures would generally apply for 2018 and later taxation years.
Constraining access to lifetime capital gains exemption (“LCGE”) for minors and beneficiaries of trusts
Under these proposals, for dispositions after 2017, individuals would no longer qualify to use the LCGE for gains that accrue or are realized before the individual attains 18 years of age, nor would it be possible to claim the LCGE against gains realized or accrued while the shares were in a family trust. The Government has proposed transitional rules to provide the opportunity for taxpayers to elect to recognize gains and realize some tax benefit provided for under the current tax laws.
Holding Passive Investments Inside a Private Corporation
The government is considering alternative approaches with the goal being that there is no longer an advantage to making passive investments (e.g., portfolio investments) in a CCPC as compared with personal savings in an investment portfolio. No drafts have yet been released, as Finance is currently in consultation to determine the preferred approach to structuring the new legislation.
The Department of Finance has requested input on their proposals until October 2, 2017. The Canadian tax community is already in the process of coordinating a prepared response that will highlight the harmful impact that these proposed law changes would have on current business owners and would further harm our economy by acting as a barrier for individuals who are considering taking on business risks. Collins Blay will also be reaching out to our local political representatives on behalf of local business owners to raise these concerns. Concurrently, we are actively assessing the impact of these changes and working on strategies that would assist our clients in navigating the law changes should these become enacted. We will be issuing a formal communication directly to our corporate clients, who are the target of this legislation. In the meantime please do not hesitate to contact us with your concerns and questions.