Tax Insights: Private company tax proposals – More “sprinkling” of changes – Update #3

October 19, 2017

Issue 2017-41

In brief

This Tax Insights outlines the three announcements made this week by Finance Minister Bill Morneau on the private company tax proposals. The most recent – made today – is that the government will not proceed with measures “relating to the conversion of income into capital gains.”

In detail

October 19 announcement: Converting income into capital gains

Today, the government confirmed that it will not move forward with legislative proposals released on July 18, 2017, that target “surplus stripping,” i.e. converting a private corporation’s regular income that would normally be paid as a salary or dividend to a principal, into corporate capital gains, which are taxed at lower tax rates.

These proposals would have applied starting July 18, 2017, but many serious concerns had been raised regarding the adverse potential impacts, in particular related to transfers of businesses among family members or on death.

However, the government also stated that in the coming year it intends “to develop proposals to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system.” The government will consult with business owners in this regard.

PwC observes

The government’s comments indicate that tax changes related to intergenerational transfers are still forthcoming. 

Hopefully, the changes will broaden access to the lifetime capital gains exemption (LCGE) when a business is transferred between family members. This would address current rules that instead provide greater tax relief for sales to third parties. 

Previous announcements: Where are we now?

Here’s how the announcements made this week affect the three tax planning strategies targeted by the July 18, 2017 proposals.

1.  Income sprinkling 

The income sprinkling proposals have two aspects. 

The proposals that restrict income splitting will proceed, but will be simplified to reduce the compliance burden. Draft legislation is expected this fall.

The measures that limit multiplication of LCGE claims will not move ahead. 

2.  Holding passive  investments in a private corporation

The proposals that limit the deferral opportunities related to passive investments in a private corporation funded with after-tax business earnings will proceed, but $50,000 of passive income will be exempt annually. Draft legislation is expected in the 2018 federal budget.

3.  Surplus stripping

As mentioned above, these proposals will not proceed, but tax changes to facilitate intergenerational transfers could be announced in the coming year.

PwC observes

PwC is pleased that the government is responding to many of the points raised in our submission to the Department of Finance. We welcome the removal of two significant proposals, namely those targeting surplus stripping and multiplication of the LCGE among family members. 

We will review the draft legislation, when released, to evaluate the income sprinkling and passive investment rules. PwC continues to be wary about the complexity these rules will add to the compliance burden of private corporations and their owners.

We await the new proposals related to intergenerational transfers to assess what they mean for private corporations and their owners. 

While the government continues to address the issues raised by PwC, we still recommend that the government engage a group of independent experts, from many disciplines and stakeholders, to further study the proposals that are moving ahead and their impact on both tax policy and the broader economy. 

The takeaway

Stay tuned. We will keep you apprised on developments as they occur. 

The changes make year-end tax planning more challenging. We would be pleased to discuss what they mean for you and your business. Please contact us.

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Contact us

Saul Plener

Saul Plener

Partner, National Leader, Private Company Services, PwC Canada

Tel: +1 905 418 3471

Ken Griffin

Ken Griffin

Partner, PwC Canada

Tel: +1 416 815 5211

Bruce Harris

Bruce Harris

Partner, PwC Canada

Tel: +1 416 218 1403

Angela Ross

Angela Ross

Principal, High Net Worth, PwC Canada

Tel: +1 416 218 1541