Tax Insights: Private corporation tax changes – Where do things stand?

October 13, 2017

Issue 2017-38

In brief

October 2, 2017 was the deadline for submissions on the July 18, 2017 proposals that target tax planning using private corporations. Public response was overwhelming. The Department of Finance (Finance) received over 21,000 submissions, including PwC’s. On October 3, 2017, Finance issued a press release outlining its next steps.

In detail

Background

On July 18, 2017, the Department of Finance released legislative proposals and a consultation paper (referred to as “the proposals”) targeting three tax planning strategies that, in the government’s view, use private corporations to gain unfair tax advantages for high-income individuals. 

Finance provided a 75-day consultation period, which ended on October 2, 2017. 

For more information, see our Tax InsightsGovernment targets tax planning using private corporations.” 

Submissions 

The proposals have caused deep concern as expressed by almost every industry, business and special interest group in Canada. As a result, Finance received over 21,000 submissions from interested parties, including from PwC. 

PwC’s submission

PwC’s submission addresses the technical elements of the proposals. In addition to detailed commentary on the three areas of focus of the proposals, we made the following general comments:

  • a group of independent experts, from many disciplines, and stakeholders should be engaged to study the proposals and their impact on both tax policy and the broader economy, and to provide recommendations for next steps
  • the 75-day consultation period should be extended to allow business owners and other professional organizations more time to properly consider the proposals and provide  comprehensive feedback 
  • if the proposals are enacted in their current draft form, the application of the new rules to circumstances not intended by the government will result in an unfair application of tax, and the compliance and administration of the new rules will be unreasonably heavy for both taxpayers and the Canada Revenue Agency 
  • the proposals can have retrospective application in certain situations (as illustrated in the appendices to our submission), therefore, transitional rules should be provided
  • the proposals were described as necessary to “close loopholes” and that business owners are “using corporate structures to avoid paying their fair share” of tax; we believe the proposals represent fundamental changes to current tax policy and should be described as such

Read our complete submission.

Finance press release

A press release issued on October 3, 2017, confirms Finance’s commitment to fix “a tax system where wealthy and high income individuals are encouraged to use their private corporations to pay lower tax rates than middle class Canadians,” but also states that the government will “act on what it has heard” from “small business owners, professionals and experts.”

According to the press release, the government’s next steps will be based on five key principles:

  1. “Support small businesses and their contributions to our communities and our economy.
  2. Keep taxes low for small businesses, and support owners to actively invest in their growth, create jobs, strengthen entrepreneurship and grow our economy.
  3. Avoid creating unnecessary red tape for hard-working small businesses.
  4. Recognize the importance of maintaining family farms, and work with Canadians to ensure we don't affect the transfer of a family business to the next generation.
  5. Conduct a gender-based analysis on finalized proposals, to ensure any changes to the tax system promote gender equity.”

Finally, the press release includes a quote from Finance Minister Morneau indicating that the focus of any changes is on “a small number of wealthy incorporated individuals.”  

What’s ahead?

Many questions remain. For example:

  • how far will our government go in backing down or revising the proposals to narrow (and clarify) their impact?
  • when will new proposals be released? 

We expect that Finance will require considerable time to read and digest the many submissions it received. Modifying the rules, for example to ensure that family business transfers are not adversely affected, may not be straightforward.  

However, given that the proposed measures addressing “income sprinkling” were to take effect starting January 1, 2018, and that measures to address the conversion of income into capital gains (“surplus stripping”) were proposed to become effective immediately on July 18, 2017, Finance recognizes that taxpayers will require guidance shortly.

The uncertainly makes year-end tax planning more challenging. For help, see our upcoming Year-end tax planner and contact us.

Although the submission deadline has passed, we encourage interested parties to continue to contact Finance to voice their concerns. As well, reach out to us with your questions.

We will keep you apprised of developments as they occur.

 

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Contact us

Saul Plener

National Private Company Services Leader, PwC Canada

Tel: +1 905 418 3471

Ken Griffin

Partner, PwC Canada

Tel: +1 416 815 5211

Bruce Harris

Partner, PwC Canada

Tel: +1 416 218 1403

Angela Ross

Principal, High Net Worth, PwC Canada

Tel: +1 416 218 1541

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