Date: March 5, 2018
Author: Karen D. Stilwell
Budget 2018 was released on February 27, 2018 and, with its release, came a degree of closure to the drama that unfolded following the July 18, 2017 announcement of a package of proposed changes to the taxation of Canadian private corporations and their shareholders. The changes as initially proposed threatened to both suddenly and fundamentally rearrange the framework that has defined the taxation of private corporations in Canada for decades. The mere announcement destabilized small and medium sized incorporated business and galvanized tax professionals across the country. All were duly stirred from summer slumber.
Seven months have passed. In the intervening period the federal government has retreated significantly from its initial set of proposals. It did this first through a series of announcements during “Small Business Week” in October, 2017, indicating that certain of the more devastating proposed technical changes to the surplus stripping rules would be abandoned. Then, on December 13, 2017, revisions to the initial proposal for changes to the taxation of dividends received by family members from incorporated family business were published. Finally, last week, Budget 2018 set out the long awaited legislative changes to the taxation of corporate passive income.
Life is not about to get easier for the small or medium sized business owner. Without exception, the changes in their current iteration increase the overall tax and compliance burden for small and medium sized incorporated business. But, whereas we were originally promised changes that would wreak havoc on the fundamentals of taxation of private Canadian corporations, the prognosis has improved. We were promised fire, but we appear to have landed in the frying pan.
Here is your need-to-know about the corporate tax changes as they stand today:
Passive Income: Two significant changes to be made to the taxation of passive income earned in a corporation are effective for taxation years that begin after 2018:
Tax on Split Income: The final version of the rules governing the taxation of dividends received by family members from incorporated business were released on December 13, 2017. The new rules significantly constrain the ability once commonplace to split income among family members through discretionary dividend and family trust structures. To the extent that the new rules create space for continued income splitting, several of the new rules contain a degree of vagueness and uncertainty that will be intolerable for many taxpayers.
Listed below are a few highlights of the new regime which became effective January 1, 2018:
(i) that earn less than 90% of their income from a service business;
(ii) that are not professional corporations; and,
(iii) of which the individual owns at least 10% of the votes and value.
The concept of “service business” is not defined. Individuals have until the end of the calendar year to meet the 10% votes and value criterion in order to qualify for income splitting throughout 2018.
Under this new regime, income splitting is now less the rule and more the exception. The new regime is also complex and highly fact sensitive. As a result, it is recommended that anyone accustomed to income splitting under the old regime consult with a tax specialist for advice on whether and how it might be possible to preserve such treatment under the new rules.
By far, the frying pan we find ourselves in is preferable to the fire we were promised. While we breathe a collective sigh of relief that cooler heads prevailed, the result nonetheless is that tax complexity continues to grow, the compliance burden on small business mounts and questions about tax fairness remain unanswered. If we have learned anything from the last seven months, it is that it is time for a comprehensive review of income taxation in Canada.
For more information, contact Karen 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.