Today, Prime Minister Justin Trudeau and Finance Minister Bill Morneau made the following announcements concerning the private company tax proposals:
The announcements are a welcome start, reflecting many of the points made by PwC in its submission to the Department of Finance. Further modifications to the private company tax proposals are expected throughout this week. Revised draft legislative proposals are expected later this fall.
Deep concern was created by the legislative proposals and a consultation paper (referred to as “the proposals”), released on July 18, 2017, targeting three tax planning strategies that, in the government’s view, use private corporations to gain unfair tax advantages for high-income individuals.
Over 21,000 submissions were made to the Department of Finance from interested parties, including PwC.
Today, the government announced several changes that respond, in part, to our submission.
PwC’s October 3, 2017 press release made the following points:
The government stated today that it “intends to move forward with measures to limit income sprinkling using private corporations, while ensuring that the rules will not impact businesses to the extent there are clear and meaningful contributions by spouses, children and other family members.”
To do this, as previously proposed, the “tax on split income” rules will be extended to spouses and all adult children, subject to reasonableness tests.
These adults will be required to demonstrate their contribution to the business based on four basic principles:
Today’s announcement vows “to simplify the proposed measures with the aim of providing greater certainty for family members who contribute to a family business.”
To this end, the government intends to:
Later this fall, the government intends to release revised draft legislative proposals reflecting these changes to the income sprinkling proposals, which will be effective beginning January 1, 2018.
The government is moving in the right direction in its efforts to simplify the income sprinkling proposals. However, we await the revised draft legislation to assess whether the compliance burden will be sufficiently eased.
It appears that our government’s focus remains on professional corporations and other service businesses because, for these businesses, it may often be difficult to demonstrate that family members have made “meaningful contributions,” under the principles outlined above.
The government also announced that it will not proceed with the proposals that address the multiplication of the LCGE.
These proposals would have limited access to the LCGE in certain situations (for example, by denying the exemption in respect of shares held in a trust arrangement), but concerns had been expressed that intergenerational transfers of family businesses could be adversely affected.
We welcome the withdrawal of this measure. We had noted that, in many cases, the proposals would have resulted in significant additional tax in common family business ownership structures.
The federal small business income tax rate will be reduced from 10.5% to 10% on January 1, 2018, and will further decline to 9% on January 1, 2019.
Combined federal and provincial/territorial small business rates for 2017 to 2019 are shown in the Appendix.
Although the Liberal party’s tax platform had promised to reduce the small business rate to 9%, its 2016 federal budget cancelled reductions that would have caused the rate to fall to 9% by January 1, 2019.
When fully implemented in 2019, the reduction will result in a maximum annual tax saving of only $7,500 for eligible small businesses.
While tax reductions are always welcome, the planned reduction is modest assistance given the significant investment required for innovation, technology and people.
Finance Minister Morneau commented that he will continue to listen and reach out to interested parties and address their concerns.
PwC reaffirms its view that the private corporation tax proposals changes could have far reaching impacts on the economy.
We recommend that the Minister of Finance engage a group of independent experts, from many disciplines and stakeholders, to further study the proposals and their impact on both tax policy and the broader economy.
This should include an assessment of the potential impact of the proposals on future investment in Canada and its ability to attract and retain top talent.
We await the further announcements coming this week on other aspects of the proposed tax changes for private corporations and the resulting revised draft legislative proposals to be released later this fall.
We continue to encourage interested parties to contact Finance to voice their concerns. As well, reach out to us with your questions.
The changes make year-end tax planning more challenging. For help, see our upcoming Year-end tax planner and contact us.
We will keep you apprised of developments as they occur.
For more information
See our Tax Insights:
Rates on active business income earned in Canada to $500,0001 (twelve-month taxation year ended December 31)2
|Manitoba||10.5 or 22.5||10 or 22||9 or 21|
|Newfoundland and Labrador||13.5||13||12|
|Prince Edward Island||15||14.5||13.5|
[1.] The $500,000 threshold applies federally and in all provinces and territories, except in Manitoba where:
If taxable capital employed in Canada (in Quebec, paid-up capital) of associated CCPCs in the preceding year exceeds $10 million, the federal and all provincial and territorial small business rates will be higher.
[2.] The table reflects provincial and territorial rate changes and CCPC threshold changes that are implemented by draft or enacted legislation.