Finance intends to proceed with some aspects of its private company tax proposals.
Although the government recently announced that it was abandoning some proposals and modifying others, Finance says it will proceed with changes to the rules on income sprinkling and passive investments. Finance has also announced that it intends to decrease the small business tax rate to 9% (from 10.5%) by 2019. However, the government has cancelled its proposed changes to effectively limit access to the lifetime capital gains exemption (LCGE) and to prevent the conversion of income into capital gains.
While the government's recent announcements that it would abandon certain aspects of the private company tax proposals are welcome news, small business owners are still waiting for Finance to release legislation to clarify how the rules will change. Finance indicated it would release new draft legislation to address income sprinkling "this fall" while draft legislation related to the new passive investment income regime would be included in the 2018 federal budget.
The government released a consultation paper and complex proposed rules and approaches to address certain tax planning involving private corporations on July 18, 2017 (see TaxNewsFlash-Canada 2017-38, "Finance Targets Private Company Tax Planning"). The consultation paper, "Tax Planning Using Private Corporations", looks at strategies that Finance believes "inappropriately reduce personal taxes".
Income sprinkling using private corporations
Finance says it will proceed with its proposals to address income sprinkling using private corporations, but that it will make amendments to "simplify" these planned changes. Finance says that businesses with family members who "meaningfully contribute" to the business will not be affected (see TaxNewsFlash-Canada 2017-46, "Small Business Tax Rate Drops to 9% by 2019"). Finance says it intends to release revised legislation "this fall" and that the proposed changes will be effective for the 2018 and subsequent taxation years.
Passive investments held in private corporations
Finance announced that it will proceed with its proposed tax increase on passive investment income held in a private corporation, but has now stipulated that there will be no tax increase on passive investment income below a $50,000 annual threshold. Finance says that it intends to release details of its proposed passive investment measures as part of its 2018 federal budget (see TaxNewsFlash-Canada 2017-47, "Private Companies - Passive Income Relief Announced") and noted that it will maintain incentives to encourage venture capital and angel investors to invest in innovative companies. Finance has said that the new regime for passive investment would apply on a "go-forward" basis, but has not indicated when the new regime will take effect or how the new regime will be structured.
Finance also said it will consider how the new rules will affect capital gains, including whether capital gains realized on the sale of shares of a corporation engaged in an active business should be excluded in certain situations.
Reduction to the small business tax rate
Although not originally announced as part of its private company tax changes, the government has since announced that it will decrease the small business tax rate to 9% (from 10.5%) by 2019 as part of new tax relief for private companies. As a result, the small business tax rate will decrease to 10% effective January 1, 2018 and to 9% effective January 1, 2019 (see TaxNewsFlash-Canada 2017-46, "Small Business Tax Rate Drops to 9% by 2019"). In its fall economic statement, the government announced consequential changes to adjust the gross-up factor and dividend tax credit that applies to non-eligible dividends (i.e., amendments to section 84.1 and proposed new section 246.1, see TaxNewsFlash-Canada 2017-49, "Highlights of the 2017 Fall Federal Economic Update").
Although no specific details were announced, Finance said it is still considering how to make intergenerational transfers of small businesses, including farms, more efficient and less difficult (see TaxNewsFlash-Canada 2017-48, "Proposed Anti-Surplus Stripping Rules Dropped").
Finance has announced that it will not proceed with the following proposals affecting private corporations:
For more information, contact your KPMG adviser.
Information is current to October 31, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500