Proposed tax changes for private

Proposed tax changes for private corporations and: –

The period after consultation….

Last week Federal Finance Minister Bill Morneau and Prime Minister Justin Trudeau released details on the outcome of the proposed tax changes for private corporations. They provided us with the information in stages, starting Monday October 16th, which ensured we were holding onto our seats until the end of the week.

Yet, I went home on Friday feeling the same way I had felt when these rules were originally released on July 17th – baffled, confused and stressed. Proposed tax changes

  • Baffled, because I could not comprehend how they could have read 21,000 submission papers in sufficient detail in 10 business days to evaluate the true impact of these changes on the business community.
  • Confused, because I was still unclear on so many aspects of these changes that it is difficult to do any planning before the end of the year (assuming these rules come into effect January 1, 2018).
  • Stressed, because I have clients who have been using these tax strategies for years and now have to modify their planning in just two months.

Here are a few of the details released last week by the Government:

1. Small business tax rate federally to be reduced to 10% starting January 1, 2018 and 9% starting January 1, 2019. If I am not mistaken, this reduction was originally announced in the 2015 election campaign but was absent in both Budget 2016 and Budget 2017 once the Liberals took power.  Also, I understand Justin Trudeau was quoted during Election 2015 saying that small businesses are “ways for wealthier Canadians to save on their taxes…”  By reducing the tax rate, are we encouraging complex tax planning strategies and ensuring that only the wealthy can get the proper professional advice? I will happily take a lower tax rate – as I’m sure all members of the business community would – however, I do not like to be chastised like a child who was wrongly accused of doing an act (i.e. “tax cheat”). Is the reduced tax rate an apology to all business owners who were very rightfully upset with the original proposed rules?

2. Income sprinkling – adding a “contribution” test when paying dividends to family members.

The original rules released had essentially said that where a dividend was paid to a family member it would be subject to the highest marginal tax rate for individuals unless it was considered “reasonable”. This concept has not changed although the Liberals have now confirmed the four criteria to be used to determine what is reasonable: labour contributions, capital or equity contributions to the business, taking on financial risks of the business and/or past contributions of labour, capital or assumed financial risks.

I am puzzled as to how you can measure someone’s past contributions to a business and use it as a basis for determining whether the future dividend paid is “reasonable”?  Imagine trying to justify a dividend as reasonable to the CRA. I suppose that everyone must wait until case law develops over the coming years to see how this is applied – so much for certainty in the application of tax rules! Proposed tax changes

3. Lifetime Capital Gains Exemption – the Government is not moving forward with measures to limit access to this exemption – which is a relief!

4. Holding passive investments in a Corporation – a $50,000/year threshold has been added for passive income earned in a corporation starting January 1, 2018 (assuming this is meant by “on a go forward basis”) to be taxed at the current tax rates. Anything above will be taxed at a higher rate.

I am already having difficulty imagining the compliance when keeping track of the returns on the pre-2018 portfolio vs. post-2018 portfolio and reporting for them.

5. Maintaining venture capital and angel investor incentives for small business owners investing in these vehicles.

Do these include all industries? How will a venture capitalist or angel investor go about getting an approval from the CRA to be able to approach potential investees?

So many questions and so few answers.

I am relieved that some of the original proposals have been taken off, amended, oh wait “tweaked.” However, I do not appreciate the lack of time we are given as business advisors to be able to review, implement and help our clients who have used these tax strategies for years in saving for their retirement.

I am hopeful that additional information will come out soon (perhaps part of the Economic update to be released October 24), if not, we will have to wait until Budge 2018. Proposed tax changes proposed tax changes

I would strongly urge all business owners to talk to their accountant and financial advisors to ensure they are ready for these new changes. Although we do not have much information as of now, we can definitely think of strategies to employ as there is no “one size fits all” strategy.

Harpreet K Wadehra is a CPA, CA and principal of Wadehra Professional Corporation

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