Skip to main content Skip to search
130 DUNDAS STREET EAST SUITE 201 MISSISSAUGA
Mon - Sat: 9:00 - 18:00
905-270-1581
charles@charlesrussellcpa.com

TO BE

accounting service featured
accounting
accounting help

  pwc      Canada

 

Tax Insights: Private contpany tax proposals -More ”sprinkling” of changes –                   Update # #October 1 9 , 2 01 7

 Issue 2017-41

 In brief

This Tax Insights outlines the three announcements made this week by Finance Minister Bill Morneau on the private company tax proposals. The most recent – made today – is that the government will not proceed with measures “relating to the conversion of income into capital gains.”

In detail

October 19 announcement: Converting income into capital gains

Today, the government confirmed that it will not move forward with legislative proposals released on July 18, 2017, that target “surplus stripping,” i.e. converting a private corporation’s regular income that would normally be paid as a salary or dividend to a principal, into corporate capital gains, which are taxed at lower tax rates.

These proposals would have applied starting July 18, 2017, but many serious concerns had been raised regarding the adverse potential impacts, in particular related to transfers of businesses among family members  or on death.

However, the government also stated that in the coming year it intends “to develop proposals to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system.” The government will consult with business owners in this regard.

PwC observes

Government’s comments indicate that tax changes related to intergenerational transfers are still forthcoming

Hopefully, the changes will broaden access to the lifetime capital gains exemption (LCGE) when a business is transferred between family members. This would address current rules that instead provide greater tax relief for sales to third parties.

Previous announcements : Where are we now?

Here’s how the announcements made this week affect the three tax planning strategies targeted by the July 18, 2017 proposals.

1.   Income sprinkling

The income sprinkling proposals have two aspects .

The proposals that restrict income splitting will proceed, but will be simplified to reduce the compliance burden. Draft legislation  is expected this fall.

The measures that limit multiplication of LCGE claims will not move ahead .

2.   Holding passive  investments  in a private corpora tion

 The proposals that limit the deferral opportunities related to passive investments in a private corporation funded with after-tax business earnings will proceed, but $50,000 of passive income will be exempt annually. Draft legislation is expected in the 2018 federal budget.

3.   Surplus stripping

As mentioned above , these proposals will not proceed, but tax changes to facilitate intergenerational transfers  could be announced in the coming year.

PwC observes

 PwC is pleased that the government  is responding to many  of the points raised in our submission to the Department of Finance. We welcome the removal of two significant proposals, namely those targeting surplus stripping and multiplication of the LGCE among family members.

We will review the draft legislation , when released, to evaluate the income sprinkling and passive investment rules. PwC continues to be wary about the complexity these rules will add to the compliance  burden of private corporations and their owners .

We await the new proposals related to intergenerational transfers to assess what they mean for private corporations and their owners .

While the government continues to address the issues raised by PwC, we still recommend that the government engage a group of independent experts, from many disciplines and stakeholders , to further study the proposals that are moving ahead and their impact on both tax policy and the broader economy.

The TAKEAWAY    .  We will keep you apprised on developments as they occur. The changes make year-end tax planning more challenging.We would be pleased to discuss what they mean for you and your business. Please contact us.

For more information

See PWC Tax Insights:

 •   “Government  targets tax planning using private corporations

  • “Private corporation tax changes: Where do things stand?”
  • “Private company tax proposals: Government’s initial response to outcry”
  • “Private company tax proposals: More “sprinkling” of changes –  Update #2″

See PWC: •   submission to the Department of Finance

  • press release
  • upcoming Year-end tax planner

 Contact us

Saul Plener

National Leader, Private Company Services Tel:  +1905418 3471

Email

 

Ken Griffin

Partner

Tel:  +1416815 5211

Email

 

 

 

 

Bruce Harris

Partner

Tel:  +1416218 1403