Proposed Tax Changes – An Update
Tuesday, October 24th, 2017
Prime Minister Justin Trudeau and Minister of Finance Bill Morneau made several announcements during the week of October 16th, indicating that the Liberal government intends to stay the course with the majority of the proposed tax changes. They then proceeded to withdraw a number of the proposals, one at a time. Their continued focus appears to be the limitation of income sprinkling using private corporations. The Government will target businesses that utilize income sprinkling with spouses and children who do not contribute to the business. That said, the Liberals promised to reduce the compliance burden with respect to establishing labour, capital, risk, and past contributions by family members who are actively involved in the business.
The government received approximately 21,000 submissions during the 45-day consultation period. Based on the feedback the Liberals decided not to move forward with the measures to limit access to the Lifetime Capital Gains Exemption (LCGE) and strategies relating to the conversion of income into capital gains. No legislation or further comments have been provided relating to the aforementioned issues. However, it would appear that the LCGE multiplication strategies and pipeline plans are safe. Unfortunately, in the absence of details, it is difficult to be confident.
The Liberals also announced that the corporate tax rate (federal) would decrease by 1.5% (to 9%) by 2019. This decrease is intended to stimulate the business environment in Canada and enhance reinvestment opportunities for small businesses. However, this move appears to exacerbate the gap between the corporate and personal tax rates. Ironically, the Federal government identified this gap as the impetus for the announced changes in the first place. In one of the backgrounder documents, it states that: “This gap…has had the consequence of encouraging high-income individuals to use incorporation as a means to access the lower tax rate, and gain an unfair tax advantage.” It is surprising to say the least, that the government decided to lower the corporate rate and without any adjustment to the personal rates.
Messrs. Trudeau and Morneau claim that the lower tax rate will allow businesses to reinvest the excess funds into new equipment, yet they remain unflinching in their effort to introduce the highly controversial proposals designed to tax passive funds held by a corporation. It appears that the new measures will only apply on a go-forward basis. According to Ministry of Finance commentary, existing investments, including the future income earned on these investments is outside the scope of the proposed legislation. New investments and the income they generate will be subject to the new rules. Moreover, a passive income threshold of $50,000 per year for future investment income will be introduced. In other words, only passive income that exceeds $50,000 per year will be subject to the new rules. What exactly those rules entail remains a mystery at this point.
It is obvious that the intention is to target income splitting strategies as well as increase taxes on passive income earned by corporations. The Government will release revised draft legislative proposals relating to income sprinkling later this fall. The proposed changes will be effective for the 2018 and subsequent taxation yeas. The draft legislation relating to passive investment income is expected to be released as part of the 2018 Budget.