December 13, 2017
Today, there were two important developments relating to the private company tax proposals:
The December 13 amendments are intended to clarify whether a family member is significantly involved in a business, and thus potentially excluded from being taxed at the highest marginal tax rate (i.e. subject to the new income sprinkling rules, referred to as the “tax on split income” or “TOSI”) on non-salary income or gains derived from that business.
Amounts received in a year in the following situations will be excluded:
in which case the “ownership exclusion” applies
Individuals aged 25 or over who do not meet any of the above exclusions would be subject to a reasonableness test to determine how much income, if any, would be subject to the TOSI.
In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income. Otherwise these individuals will be allowed to earn a prescribed rate of return on capital contributed in support of the business.
These measures will apply starting with the 2018 taxation year, except that for dividends on, or gains from the disposition of, shares taxpayers will have until the end of 2018 to meet the ownership exclusion test. The measures will be legislated as part of the 2018 budget process.
Today’s release also confirms that the government will move forward with measures to limit tax deferral opportunities related to passive investments in a Canadian-controlled private corporation. Details will be included in the 2018 budget. When introduced, the passive investment measures will apply only on a go-forward basis.
The revised draft income sprinkling rules do simplify the draft rules released on July 18, 2017, and we now have the benefit of some initial CRA guidelines for their application (essentially, a series of examples). However, there will continue to be significant complexity in applying these rules to many typical business structures. This will create uncertainty for many business owners without any grandfathering for current arrangements.
Some initial observations are:
Recognizing that the proposed changes to the taxation of private corporations create deep concern for Canadians, the Senate had authorized the Standing Senate Committee on National Finance to study them.
The study considered witness testimony and written submissions. In particular, it focused on the impact of the proposed changes on:
The study culminated in the release of the committee’s 43-page report “Fair, Simple and Competitive Taxation: The Way Forward for Canada,” which provides three recommendations:
Stay tuned. We will keep you apprised of developments as they occur.
The changes can make tax planning for private companies more challenging. We would be pleased to discuss what they mean for you and your business. Please contact us.
To learn more about the private company tax changes, see our Tax Insights:
Download a PDF
Tax Insights: Income sprinkling rules announced as Senate comments on private company tax proposals
Of further interest
Tax Insights: Private company tax proposals – More “sprinkling” of changes – Update #3
Tax Insights: Private company tax proposals – More “sprinkling” of changes – Update #2
Tax Insights: Private company tax proposals – Government’s initial response to outcry
Tax Insights: Private corporation tax changes – Where do things stand?
Tax Insights: Government targets tax planning using private corporations
PwC Submission to the Department of Finance: Tax Planning Using Private Corporations
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