Update on new tax rules affecting business-owners
On September 25, 2017, the Canadian Tax Foundation held a policy conference – Tax Planning Using Private Corporations: Analysis and Discussions with Finance where tax practitioners and the Department of Finance (“Finance”) were given the opportunity to discuss and comment on the July 18, 2017 draft legislation and consultation paper – Tax Planning Using Private Corporations. For the most part, Finance was reticent to comment on these proposals prior to the end of the consultation period on October 2, 2017. However, it did provide limited guidance on some of the issues of concern which were raised in our July 2017 release.
Dividend and Capital Gain Sprinkling
1. Finance clarified that its proposals relating to dividend sprinkling may not apply to a family member who has made a significant, risky capital investment in a business and who is otherwise not involved in the business. In particular, Finance noted that as a result of the risk associated with the investment, the individual would be permitted to receive an extraordinary rate of return without triggering the “tax on split income” rules.
2. Finance views the proposals which target the conversion of capital gains into dividends as a means of levelling the difference between the dividend tax rate and the capital gains tax rate. Finance is not aware of any plans to otherwise increase capital gains rates or lower dividend tax rates.
3. Finance is aware that the proposals which target the conversion of capital gains into dividends impact intergenerational transfers of family businesses. Although Finance is considering relief for legitimate transfers, the methodology to provide this relief is under study.
4. Finance provided some comfort with respect to the ability of a corporation to pay a capital dividend to individuals where the increase to the capital dividend account emanates from an arm’s length disposition of assets.
5. No general comfort was provided with respect to the post-mortem planning strategies typically used to maintain the capital gains tax rate on death of approximately 25% on shares of private corporations. However, it was stated that transitional relief for pre-July 18, 2017 circumstances would be considered. Finance also stated that accommodations to alleviate potential double tax on death may also be considered on a go-forward basis.
Passive Investment Income
6. Finance stated that it is not the intention for these measures once determined to have any impact on existing passive investments or on income accruing on such investments.