T 514-875-2865 / 1-888-355-6697 | F 514-866-0247 | info@flmontreal.com
Recap of the July 18, 2017 Proposals & the Modifications Announced This Week by Finance Minister
19 10 2017

Recap of the July 18, 2017 Proposals & the Modifications Announced This Week by Finance Minister

Here’s a recap of the July 18, 2017 proposals and the modifications announced this week (October 16, 2017) by Canada’s Finance Department:

Federal Corporate Tax Rate on Small Business Deduction:

July 18, 2017
No Mention

Modifications – Week of October 16, 2017
The Federal corporate tax rate for the Small business deduction on Small is 10.5%. The rate will fall to 10% on January 1, 2018 and 9% on January 1, 2019.

If an incorporated small business earns an average profit of $107,000, the tax rate reduction will result in tax savings of $1,605 for that business in 2019.

Listen to FL Fuller Landau’s Tax Partner Nick Moraitis’ comments on the above on CJAD’s The Aaron Rand Show and on Today’s Entrepreneur with FL’s Partner Josh Miller:

Income Splitting:

July 18, 2017
Applied to almost any income received from a family business and to all family members other than the Founder.

Modifications – Week of October 16, 2017
Continues to apply, but restricted to those not involved in the business or with no meaningful contribution to the business. The rules will also be simplified.

The rules proposed on July 18, 2017 were complex and would have been subject to contestations with Canada Revenue Agency. Hopefully the red tape required will be greatly reduced and the value of work provided by family members will be recognized as contributing to a business’s success.

Capital Gains Exemption (CGE)

July 18, 2017
No CGE for family members subject to Tax on Split Income. Minors not eligible. Trusts not eligible. Election to crystallize CGE in 2018.

Modifications – Week of October 16, 2017
Finance now says: “will not be moving forward with these measures”.

Taken at face value, Finance’s abandonment of the CGE restrictions is testament to the power of dissent by the population. Holding shares of private business corporations by family trusts continues to be an excellent structure.

Converting Income to Capital Gains

July 18, 2017
Restrictions applied to shareholder level taxation (estate scenario, parent selling to child), and internal corporate scenario (capital gain and goodwill sales). Capital gains become dividends and no capital dividend account.

Modifications – Week of October 16, 2017
Finance now says: “will not be moving forward with these measures”.

This is a huge relief for an estate and for the succession of a family business or farm operation.

Taxation of investment Income in Corporations

July 18, 2017
Proposed elimination of the refundable taxes and the tax-free capital dividend. Effective tax of +70% on the combined corporate and personal taxes on passive income.

Modifications – Week of October 16, 2017
Grandfather existing investment portfolios under existing rules. Cash added in future from business profits subject to new regime which has no Refundable Dividend Tax on Hand (RDTOH) + Capital Dividend
Account (CDA).

However, can build a future portfolio that earns $50,000 investment income annually that is taxed under existing rules. Details will be issued in Budget 2018.

Very few details are available so many questions remain unanswered. However, the compliance burden on investment corporations will be huge to track all the assets and the income earned of the assets.

With respect to passive investment income, it has been indicated that private corporations are an important source of funding for the angel investment and venture capital sectors, and that firms raising money from venture capital investors often raise more than they immediately need, investing these funds passively before they are put to work in their business.

The Government will move forward with measures to limit the deferral benefits of passive investments within private corporations that focus on high-income earners. In doing so, it will also protect the ability of middle class business owners to save the funds they need for future investments, such as an upcoming business expansion. Any measures in this area will only apply on a go-forward basis, and will only have implications at the time when money is paid out to shareholders.

In summary, this is a significant about face by the Liberals, although they are pushing ahead with the income splitting and the passive investment income taxation.

Print Friendly, PDF & Email

Comments are closed.