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Proposed Federal Tax Changes

Proposed Federal

In August 2017, the Government of Canada introduced tax changes that specifically effect small business and the taxes payable.

We have broken down the Federal Tax changes down into two parts:

 

The pending tax changes are meant to effect the following area’s of the corporate income tax reporting. These are:

  • Income Sprinkling. This is where income is split to minors in an effort to lower overall tax burden from both the corporation and shareholders. The proposed changes will be only allow this type of income reporting should the work be preformed (passive compensation not permitted), capital contributed into the corporation, risk assumed by the minors and adult children as well compensation for services already completed.
  • Capital Gains Deductions (Minors). The capital gains deduction presently allows business owners, farms and fisherman to shelter a lifetime maximum of capital gains on dispositions of qualified business corporation shares, qualified fishing property and qualified farming property from taxation. The limitation proposed are that the capital gains deduction (noted above) will no longer be available for minors. With Gains Accruing while a Minor, if the individual held shares when they were a minor any portion of the capital gain accrued during that time is not eligible for the capital gains deduction.
  • Employee Profit Sharing Plans (EPSP). For the capital gains allocated to the individuals by the trust governed by the EPSP, the capital gains deduction will not be available.
  • Split Income. If the taxable capital gain is consider split income, it will also not be able to be sheltered under the capital gains deductions.
  • Gains Accruing Prior to Rollout from the Trust. If the personal trust holds the shares any capital gain accrued while the shares were held by the trust will not be eligible for capital gains deduction.
  • Holding of Passive investments Inside a Private Corporation. Federal Government proposal that Investment Income held in a Canadian Controlled Private Corporation will now be taxes at the highest personal rate of 33 per cent federally with the elimination of the refundable mechanism and dividends will be taxes to the individual shareholders based on the source of the fund to make the investments (income tax at the small business rate vs income taxes at the general corporate rate vs after-tax funds contributed by the shareholders.
  • Converting Income into Capital Gains. The Federal Government has proposed new measures which will seek out to eliminated tax plans that convert dividend income into lower-taxed capital gains. This will be broadening the current anti-avoidance legislation.
  • Intergenerational Business Transfer. This will apply to eliminate the purpose of a shareholder selling shares to a related person in which this was done to remove corporate surplus on a tax-free basis using the lifetime capital gains deduction or adjusted cost base that exists based on Valuation Day. Legitimate transactions aside, this will close the opportunity to use the lifetime capital gains deduction for this purpose.
The Federal Governments changes will impact a vast number of CCPC (Canadian Controlled Private Corporations). We are working with each of our clients to see how these proposed tax changes will effect the overall tax burden. If you feel your business may be effected please contact our office to discuss this.

These changes will have an impact on the largest sector of business in Canada (85 to 90% percent of all corporations are either small to medium size). The proposed changes are the greatest in over 50 years and will effect those business owners who have tried to succeed only to see these proposed tax changes effectively costing increased tax liabilities not to mention additional compliance reporting.

These changes are proposed which means that your input if vital. Contact your local Member of Parliament (MP). A Listing of all the current Members of Parliament is available by clicking here. Important note, letters to your Members of Parliament, Prime Minister does not require postage if send from within Canada.

The Federal Government has prepared an in-depth Discussion Paper which can be viewed by clicking this link (will open the discussion paper as a PDF document): Discussion Paper (PDF)

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