Commentary & Analysis from: Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice
As Jamie Golombek observed in a recent interview: “Perhaps the hottest issue this entire year so far, in fact in the last 40 years, is the changes proposed to the private corporation tax rules.”
While it’s fair to say the original proposal created considerable controversy, it seems clear that Finance Minister Bill Morneau is seriously considering re-drafting the tax package as initially proposed.
Proposals in a nutshell
In a nutshell, the government’s original small business tax proposals include halting business owners from lowering their tax rate by sprinkling money to family members regardless of their involvement in the business through dividends or by paying them salaries, limiting a corporation’s ability to convert income into capital gains and dividends, and restricting the ability for private corporations to recover taxes through passive investments.
What follows is an edited and selectively modified digest of Mr. Golombek’s comments, which you can watch in full by clicking on the following link: Video – Private Corporation Tax Proposals. As he observes, there are four main issues that the government is looking at:
There are new rules coming into play on January 1, 2018 that will prevent you from paying dividends that are not reasonable, whatever that means, to not actively involved family members. We already had rules for kids under the age of 18. This will apply to a broader definition of relatives, so it’s kids, grandkids, nieces, nephews, uncles, aunts, brothers, sisters, etc. Anyone who is receiving dividends from a private company would be identified and taxed at the highest rate if they haven’t made a contribution through either labor or capital that’s ‘reasonable’ after 2017.
Multiplication of the Lifetime Capital Gains Exemption (LCGE)
Currently when you sell shares of a private company, assuming it meets the requirements for Qualified Small Business Corporation (QSBC) shares, the first $835,000 or a million dollars for farming and fishing property, is tax free. There are techniques, either involving an estate freeze or otherwise, to multiply the exemption among family members, spouse and kids, as long as the kids were of a certain age, then you could multiply this exemption out and claim multiple capital gains exemption. This will be put to a stop at the end of this year.
Conversion of Dividend Income into Capital Gains
Current legislation ensures that most corporate distributions are taxed as dividends in the hands of shareholders. There are some situations that may allow these corporate surpluses to be converted into taxable capital gains instead of regular dividends, and effectively result in distributions to shareholders being taxed at a lower rate.
Passive Investment Rules
Under current rules, many small business owners benefit from a deferral of personal tax where business income earned inside a corporation is not ultimately distributed to shareholders. These funds are typically kept inside the corporation and invested in investment portfolios, which generate passive income and gains. The new tax proposals aim to eliminate the benefit of such arrangements through a number of reforms.
Conclusion & Next Steps
For a more detailed explanation of Mr. Golombek’s remarks, please be sure to download a copy of the CIBC report called Taking Action: What you need to know and do in light of the CCPC tax rule changes. A revised article was released on Oct 23, 2017: Taking Action: Revised CCPC tax proposals What you need to know (and do) now.
The Wooding Group at CIBC Wood Gundy, 780 498-5047