Update on Tax Rules for Private Corporations and Business Owners

November 2017

Some Good News - Update on Tax Rules for Private Corporations and Business Owners

On July 18, 2017, the Department of Finance (“Finance”) released draft legislation and a consultation paper “Tax Planning Using Private Corporations” (the “Proposals”). For more information concerning the Proposals, please refer to our July 2017 and September 2017 releases.

October 2, 2017 marked the end of the public consultation period in response to the Proposals.

Since October 16, 2017, Finance has issued various news releases in response to the Proposals. Furthermore, on October 24, 2017, Finance issued a Fall Economic Statement as well as draft legislation incorporating some of their announcements.

The following is a summary of the most recent announcements.

 

Dividend and capital gain sprinkling

1. Finance has confirmed that it will move forward with the Proposals which address income sprinkling in favor of individuals 18 and older who do not meaningfully contribute to the business. It is expected that revised legislation will be released in Fall 2017. The effective date of these proposed rules remains January 1, 2018.

2. The Proposals aimed at restricting access to the Lifetime Capital Gains Exemption have been abandoned.  However, there remains uncertainty in regards to the availability of the Lifetime Capital Gains Exemption for individuals who do not meaningfully contribute to the business.             

 

Conversion of income into capital gains

3. The Proposals aimed at restricting the conversion of income into capital gains have been abandoned. However, Finance has indicated that it will continue to study the impact of the current rules governing intergenerational transfers of family businesses. Further announcements may be forthcoming.

 

Passive investment income

4. Finance confirmed that it will move forward with a new tax regime in respect of passive investment income earned through a private corporation. These new rules will only apply to passive investment income that exceeds an annual threshold of $50,000. Furthermore, these new rules will only apply on a “go-forward basis”. Passive investments already in private corporations and future income earned on such investments should be protected.

5. Finance stated that it would consider the appropriate scope of this new tax regime with respect to capital gains, particularly capital gains realized on the sale of shares of an active business. Finance will also consider the scope of the new tax regime to passive investments which support active businesses.

6. Finance also indicated that it would ensure that incentives are maintained to allow venture capital and angel investors to continue to invest and that it would consult with the venture capital and angel investment sectors to identify how this can best be achieved.

7. Finance did not give any further details regarding this new tax regime or its effective date. It is expected that proposed legislation will be released with the 2018 Budget.

 

Small business tax rate reduction

8. Finance reinstated the gradual reduction of the federal small business tax rate on the first $500,000 of qualifying active business income of a Canadian-controlled private corporation. The federal small business tax rate, currently at 10.5%, will be reduced to 10%, effective January 1, 2018, and 9%, effective January 1, 2019. There will be a consequential pro-ration for taxation years that overlap 2018 and 2019. Tax rates in Quebec and Ontario on a combined basis will be as follows for 2018 and 2019:

     Quebec    Ontario 

Small Business Tax Rate (2018)

18%

14.5%

Small Business Tax Rate (2019)

17%

13.5%

 

Personal income tax rates on non-eligible dividends

9. As a result of the decrease in the federal small business tax rate, there will be a corresponding increase of the tax rate applicable to non-eligible dividends. The combined federal and provincial marginal tax rate in respect of non-eligible dividends paid to individual shareholders in Quebec and Ontario will be as follows for 2018 and 2019:

  Quebec [1]    Ontario 

Non-Eligible Dividends (2018)

44.13%

45.74%

Non-Eligible Dividends (2019)

44.90%

46.75%



[1] The non-eligible dividend tax rates assume that the province of Quebec will not make any corresponding change to their non-eligible dividend tax rates.

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