Update on Federal Government's Response to Proposed Tax Changes

Scott Park, CPA, CA

Decrease to Small Business Tax Rate
Last week, federal finance minister Bill Morneau announced that the federal small business tax rate will decrease from 10.5% to 10% effective January 1, 2018 with a further decrease to 9% effective January 1, 2019. This came as a complete surprise to many considering the announcements he made regarding the proposed tax changes for private corporations back in July to close so called “loop holes” in the Canadian tax system.

For BC companies, the combined federal and provincial small business tax rate on active business income up to $500,000 will be as follows:
 
Now to Dec 31, 2017 – 12.5%
January 1, 2018 – December 31, 2018 – 12%
January 1, 2019 and onwards – 11%
 
Update on the July 18th Tax Proposals
After weeks of relentless opposition and a ground-swell of support against the proposed tax changes to private corporations received during the consultation period, the Department of Finance announced changes to the July 18th proposals.
 
Income Sprinkling
The Government intends to simplify the proposal to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members. The vast majority of private corporations, including corporations with family members who meaningfully contribute to the business, will not be impacted by the proposed income sprinkling measures. However, specific details were not released to explain how the proposed rules would be simplified.
 
Taxation of Passive Income
The Government intends to move forward with measures to limit the tax deferral opportunities related to passive investments, while providing business owners with more flexibility to build a cushion of savings for business purposes – for example to deal with a possible downturn or finance a future expansion – as well as to deal with personal circumstances, such as for parental leave, sick days or retirement. The intent of the new rules will be to target high-income individuals who can benefit under current rules from an unlimited, personal, tax-preferred savings account via their corporation, far beyond the pension, RRSP and TFSA limits available to other Canadians. This is inherently unfair, and the Government is committed to fixing it, while it reflects on the feedback received from Canadians during the consultation period.
 
The Government will ensure that:

• All past investments and the income earned from those investments will be protected;
• Businesses can continue to save for contingencies or future investments in growth;
• A $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal 5-per-cent rate of return) – an amount that is exceeded by only about 3 per cent of corporations – is available to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick-leave, maternity or parental leave, or retirement; and
• Incentives are in place so that Canada’s venture capital and angel investors can continue to invest in the next generation of Canadian innovation.  

 
Lifetime Capital Gains Exemption
The Government announced it will not be moving forward with proposed measures to limit an individual’s access to the Lifetime Capital Gains Exemption.
 
Conversion of Income into Capital Gains
The Government will not be moving forward with measures relating to the conversion of income into capital gains. During the consultation period, the Government heard from business owners, including many farmers and fishers that the measures could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of businesses.
 
Although these announcements are a step in the right direction, new draft legislation has not been released yet; therefore, it is still too early to be able to analyze the impact related to these updates. It is still very much a wait and see approach. A further update will be communicated when the Department of Finance releases more information.

Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.