Blog: Taxation of Private Corporations – Recent Developments

October 23rd, 2017 canada budget image

The federal government has announced that it will be modifying certain aspects of its proposed rules regarding the taxation of private corporations. Please see our Blog post Update: Tax planning for private corporations and shareholders from July 19th for more information on the proposed rules when they were first announced.

On October 16th, the government announced that it will be making changes to simplify the proposed rules regarding income sprinkling. The government still plans on implementing these rules effective January 1, 2018, and stated that the rules will not impact businesses to the extent that compensation is paid to family members for genuine contributions to the business. Reasonableness tests for adult family members aged 18 to 24, as well as those 25 and older will be introduced that will consider whether the family members have contributed to the business through any combination of the following:

  • Labour contributions.
  • Capital or equity contributions to the business.
  • Taken on financial risks of the business, such as co-signing a loan or other debt.
  • Past contributions in respect to previous labour, capital or risks.

The government also stated that it will not be moving forward with the proposed rules that would limit access to the lifetime capital gains exemption.

On October 18th, the government made another announcement regarding changes to the proposed rules, this time addressing the rules concerning the taxation of passive investment income earned by private corporations. The government stated that it will be moving forward with measures to limit tax deferral opportunities related to passive investments held within private corporations with the following considerations:

  • Ensuring that investments already made by private corporations’ owners, including the future income earned from such investments, are not subject to the proposed rules.
  • Including an annual passive income threshold of $50,000 for future, go-forward investments.
  • Ensuring that incentives are maintained so that Canada’s venture capital and angel investors can continue to invest in Canadian innovation.

The government also mentioned that these proposed rules will not apply to income from AgriInvest, a self-managed producer-government savings account.

Draft legislation concerning these passive investment income rules will be released as part of the government’s 2018 Federal Budget.

On October 19th, the government announced that it will not be moving forward with the proposed rules relating to the conversion of income into capital gains. Based on feedback received during the consultation period, the government acknowledged several unintended consequences associated with the proposed rules, including those in respect of taxation upon death and potential challenges with intergenerational transfers of businesses.

In addition to revising the proposed rules, the federal government announced that it intends to lower the federal small business tax rate to 10 per cent effective January 1, 2018, and to 9 per cent effective January 1, 2019.

Please contact your Crowe MacKay tax advisor if you have any questions about these recent developments.

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