Government Tax Proposal is a Business Killer!
The role of your advisor is to give you helpful, informed advice as you build and carry out your plan. To do this, your adviser will need to invest time to get to know you, your financial situation and how you feel about risk. Once you get clarity on what goals and plans that are important to you and your family, your adviser should help map out a way to achieve them. The real great Advisors tell you about investment opportunities and any changes that could affect reaching your goals.
As your investments grow over time, CRA will want to get their share. The tax rules are complex and depend on a number of factors including the investment type, the length of time the investment is held, the type of account used to invest and the investor’s personal situation. To optimize your after tax results and make sure you have a cohesive plan, it makes sense to have your tax advisor and your investment advisor connected and working together. While taxes should not be the sole driver of any investment decisions, it helps us to understand our client’s overall tax situation and to be aware of timing and other factors that can help mitigate the impact of taxes.
July 2017, Department of Finance released a detailed white paper
The Department of Finance released a detailed white paper proposing the most significant reform of the tax system for private corporations in Canada since the Carter Commission of 1968. The newly proposed tax-planning measures will fundamentally change the way corporate after tax income reinvested in passive investments will be managed. Here’s an overview of the proposed changes:
Three items are identified as the targets of the tax reforms announced:
- Preventing income splitting or so-called “income sprinkling”
Under the proposed changes, the “kiddie tax” provisions in section 120.4 of the Income Tax Act will be extended to apply to adults in certain circumstances, most notably where individuals do not actively contribute to the business either in terms of labour or capital. As a result, these shareholders will pay taxes on income from the business at the highest marginal tax rates.
Additionally, in some cases, sometimes through direct shareholdings or through the use of family trusts, multiple members of a family may access their Lifetime Capital Gains Deductions, allowing them to each shelter a capital gain realized on the disposition of qualified small business shares up to a lifetime limit of $835,716 and qualified farm property to a lifetime limit of $1,000,000 in 2017. The proposed rules are aimed at disallowing this.
- Prevent a deferral of tax when investing through a private corporation
Currently, small business owners can achieve a deferral of tax when they hold investments inside their company rather than paying out the income on these investments as it is earned. These proposals would eliminate this tax deferral on passive income earned in private corporations.
The release outlines a number of potential approaches centered around changes to the refundable tax regime in order to end the deferral, and asks for feedback in respect of these approaches. While it appears the government intends to maintain the 50 percent inclusion rate for taxable capital gains, these proposals would see the elimination of the inclusion of the non-taxable portion of the capital gain in the capital dividend account for this “retained income”.
The briefing document released indicates that the proposed reforms are targeted to corporate owners who are using some of their profits for passive investment, and should not impact the amount of taxes payable by corporations with no passive investment income. We do not agree with the need to change the status quo. This is clearly a tax grab.
- Prevent conversion of private corporation’s regular income into capital gains
Currently, section 84.1 applies to ensure that most corporate distributions are taxed as dividends, but in some cases may allow for corporate surpluses that would otherwise be distributed as dividends to effectively be converted to capital gains. The government proposes to shut down this type of planning.
It appears that the proposed changes will potentially eliminate post-mortem planning commonly known as “pipeline planning”. This planning is frequently used to eliminate the double – or even triple – taxation which often results when the primary shareholder of a private company dies, and their estate is distributed. However, it might also apply in other situations.
While further work and time are needed to fully analyze the proposals at a high level, our initial thoughts would be to advocate for rules which simplify rather than complicate the law in this area. These changes have the potential to add another layer of complexity to an already mind numbingly complex area. There is a need to remember that these are tax rules for small businesses, most of whom don’t engage in complex tax planning, don’t have dedicated tax people on staff, and do not have the resources to comply with overly complex tax laws. These rules risk increasing compliance costs, and distracting from the core businesses carried on.
It is important that you contact your MPs to discuss these changes. Tax Templates Inc. – has developed the following template email (along with corresponding information and resources) that can be accessed at the link here:
Feel free to modify it to your appropriate situation. In addition, please find the complete list of MPs here:
Any questions please feel free to contact us!