These are the dog days of summer, but while you may have been enjoying some well-earned sunshine and down-time, on July 18 the federal government released bombshell proposed amendments to the Income Tax Act that, if enacted, will fundamentally rearrange the system that has defined the taxation of private corporations and their shareholders in Canada for decades. Chief among the areas affected are the taxation of income split through family trusts and private company share structures, taxation of passive income earned by a corporation, and taxation of amounts extracted as capital gains rather than as dividends. The Department of Finance is accepting input from stakeholders during a consultation period that ends October 2, 2017. In the meantime, key aspects of the proposals in their current form have immediate effect as of July 18, 2017. As a result, we strongly recommend that any business owner operating through a private corporation or more elaborate corporate structure promptly reach out to a tax advisor to determine whether and how these proposals affect the taxation of income earned through the structure or the taxation of any current or proposed transactions involving a private corporation.
Key Proposals: The Highlights
Key among the proposed changes to the taxation of private corporations and their shareholders are the following:
- Extend the definition of “split income” to include forms of income not previously included, such as certain forms of interest income, taxable capital gains and indirect benefits.
- Allow for income splitting with adults individuals only if the income is consistent with what would otherwise be a reasonable arm’s-length return having regard to labour contributions made by the individual, capital contributed by the individual, risks assumed by the individual and historical rates of return.
- Deny family trusts the ability to allocate capital gains to beneficiaries in a manner that preserves access to the lifetime capital gains exemption.
- Deny the use of the lifetime capital gains exemption to minors, on any gain that accrued while the individual was a minor, that accrued while the shares were owned by a family trust or that would be considered “split income” under the new definition of split income.
- Contain transitional rules that allow some planning to be carried out now and into 2018 in order to crystallize or trigger gains ahead of the restrictions on the lifetime capital gains exemption
- Post-mortem pipe-line planning to avoid inherent potential double taxation on the death of a shareholder; and,
- Intergenerational estate freeze planning and other non-arm’s length sales of businesses.
The changes, if enacted, apply to any transaction that closes after the release date of July 18, 2017.
What To Do
If you are a small or medium-sized business owner who operates through a corporation, has a family trust, or who has a more elaborate corporate structure, these new rules affect you now. As mentioned above, many of the new proposed rules will, once enacted, have effect as and from the announcement date of July 18, 2017. In addition, there are opportunities between now and the end of 2018 to prepare for and potentially mitigate some of the expected effects. All owners of private corporations are highly encouraged to seek advice from a tax specialist as soon as possible.
For more information, contact Karen D. Stilwell, Tax Partner at Connors Stilwell.
This document contains information only and does not provide legal advice. Contact Connors Stilwell or another lawyer for advice related to your personal situation.