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2018 Changes in taxation for Small Businesses

pwc       Canada

Tax Insights: Private company tax proposals –                      Government’s initial response  to outcry

October 16, 2017

In brief

Today, Prime Minister Justin Trudeau and Finance Minister Bill Morneau made the following announcements  concerning the private company tax proposals:

  • income sprinkling rules refined – the intention is to simplify the proposals to provide greater certainty for family members who contribute (in the past or present) to a family business
  • lifetime capital gains exemption (LCGE) preserved – proposals that limit access to the LCGE will not proceed
  • small business income tax rate reduced – will drop from 10.5% to 9% over two years, starting January 1, 2018

additional  consultations welcome – 

  • although the official consultation period has ended, the Finance Minister stated that he will continue to solicit and listen to input.

The announcements are a welcome start, reflecting many of the points made by PwC in its submission to the Department of Finance. Further modifications to the private company tax proposals are expected throughout this week. Revised draft legislative proposals are expected later this fall.

Deep concern was created by the legislative proposals and a consultation paper (referred to as “the proposals”), released on July 18, 2017, targeting three tax planning strategies that, in the government’s view, use private corporations to gain unfair tax advantages for high-income individuals.

Over 21,000 submissions were made to the Department of Finance from interested parties, including PwC.Today, the government announced several changes that respond, in part, to our submission. PwC’s  October  3, 2017 press release made the following points:

  1. Transitioning a family business to family members will have a significantly higher tax cost.

      2.The 75-day consultation period is inadequate!

  1. The proposals have retrospective.
  2. Government communications to date suggest that these proposals close “loopholes.”

      5.The impact of the proposals on the Canadian economy should be considered further.

Income sprinkling

The government stated today that it “intends  to move forward with measures  to limit income sprinkling using private corporations, while ensuring that the rules will not impact businesses to the extent there are clear and meaningful  contributions  by spouses, children and other family members.”

To do this, as previously proposed, the “tax on split income” rules will be extended to spouses and all adult  children, subject  to reasonableness tests.

These adults will be required to demonstrate their contribution to the business based on four basic principles:

  • Labour contributions
  •   Capital or equity contributions to the business
  • Takinq on financial risks of the business, such as co-signing  a loan or other  debt,

In respect to previous labour, capital or risks:

Today’s announcement vows “to simplify the proposed measures with the aim of providing greater certainty  for family  members  who contribute to a family business.”

To this end, the government intends to:

  • reduce the compliance burden with respect to establishing the contributions of spouses  and family members including  labour, capital , risk and past  contributions;
  • better target the proposed  rules; and
  • address double  taxation concerns.

Later this fall, the government intends to release revised draft legislative proposals reflecting these changes to the income sprinkling proposals, which will be effective beginning January 1, 2018.

PwC observes:

 The government is moving in the right direction in its efforts to simplify the income sprinkling proposals. However, we await the revised draft legislation to assess whether the compliance burden will be sufficiently eased.

It appears that our government’s focus remains on professional corporations and other service businesses because, for these businesses, it may often be difficult to demonstrate that family members have made “meaningful contributions ,” under the principles outlined above .

Lifetime capital  gains exemption:

The government also announced that it will not proceed with the proposals that address the multiplication of the LCGE.

These proposals would have limited access to the LCGE in certain situations (for example, by denying the exemption in respect of shares held in a trust arrangement), but concerns had been expressed that intergenerational transfers of family businesses could be adversely affected.

Pwc observes:

 We welcome the withdrawal of this measure. We had noted that, in many cases, the proposals would have resulted in significant additional tax in common family business ownership structures.

Small business income tax rate:

The federal small business income tax rate will be reduced from 10.5% to 10% on January 1, 2018, and will further decline to 9% on January 1, 2019.

Combined federal and provincial/territorial small business rates for 2017 to 2019 are shown in the Appendix.

The Liberal party’s tax platform had promised to reduce the small business rate to 9%, its

cancelled reductions that would have caused the rate to fall to 9% by January 2019.

PwC observes:

When fully implemented in 2019, the reduction will result in a maximum annual tax saving of only $7,500 for eligible  small businesses.

While tax reductions are always welcome, the planned reduction is modest assistance given the significant investment required for innovation, technology and people.

Consultation period

Finance Minister Morneau commented that he will continue to listen and reach out to interested parties and address their concerns.

Pwc observes:

Pwc reaffirms its view that the private corporation tax proposals changes could have far reaching impacts on the economy.

We recommend that the Minister of Finance engage a group of independent experts, from many disciplines and stakeholders, to further study the proposals and their impact on both tax policy and the broader economy.

This should include an assessment of the potential impact of the proposals on future investment in Canada and its ability to attract and retain top talent.

The takeaway:

We await the further announcements coming this week on other aspects of the proposed tax changes for private corporations and the resulting revised draft legislative proposals to be released later this fall.

We continue to encourage interested parties to contact Finance to voice their concerns. As well, reach  out to us  with  your questions.

The changes make year-end tax planning more challenging. For help, see our  upcoming  Year-end tax planner and contact  us.

We will keep you apprised of developments as they occur.

For more information

See our Tax Insights:

“Government  targets tax planning  using private cor

Appendix.

Liberal party’s tax platform had promised to reduce the small business rate to 9%, its

cancelled reductions that would have caused the rate to fall to 9% by January

PwC observes

When fully implemented in 2019, the reduction will result in a maximum annual tax saving of only

$7,500 for eligible  small businesses.

 

While tax reductions are always welcome, the planned reduction is modest assistance given the significant investment required for innovation, technology and people.

Consultation period

Finance Minister Morneau commented that he will continue to listen and reach out to interested parties

reach  out to us  with  your questions.

The changes make year-end tax planning more challenging. For help, see our  upcoming  Year-end tax planner and contact  us.

We will keep you apprised of developments as they occur.

For more information

See our Tax Insights:

 “Government targets tax planning  using private corporations

if taxable capital employed in Canada (in Quebec, paid-up capital) of associated CCPCs in the ear exceeds $10 million, the federal and all provincial and territorial  small business

 The table reflects rate changesand CCPC threshold changes that are implemented  by draft or enacted legislation.

  • the higher rate applies to active business income from $450,000 to  $500,000

 

Tax Insights: Private company tax proposals –  Government’s  initial  response  to outcry I P… Page 6 of 6

 

Contact us

Saul Plener

National Leader, Private Company Services Tel:  +1905418 3471

Email

Ken Griffin

Partner

 

 

Tel: +1416815  5211

Email

Bruce Harris

Issue 2017-39

 

 

 

 

  • “Privaite corporation tax changes: Where do things stand? “

 

Pwc Canada

  • submission to the Department  of Finance
  • press release

 

Appendix 1

Combine d federal and provincial/ territorial small business income  tax rates (%)

Rates on active business income earned in Canada to $500,0001 (twelve-month taxation year ended December 

 

British Columbia 12 .62 12 11
Manitoba 10 .5 or 22.5 10 or 22 9 or 21
New Brunswick 13.62 13 12
Newfoundland  and Labrador 13.5 13 12
Northwest Territories 14 .5 14 13
Nova Scotia 13 .5 13 12
Nunavut 14.5 14 13
Ontario 15 14.5 13.5
Prince Edward Island 15 14.5 13.5
Quebec                                General 18.5 18 17
M&P 14.5 14 13
Saskatchewan 12 .5 12 11
Yukon                                  General 13 12 11
M&P 12 11.5 10.5

[1.] The $500,000 threshold applies federally and in all provinces and territories, except in Manitoba

Tax Insights:  Private company tax proposals –  More ”sprinkling” of changes –   Update #2

October 18 , 2017

 Issue 2017-40

 In brief

Today, Finance Minister Bill Morneau made his second announcement of the week on the private company tax proposals. He confirmed that the government will “move forward with measures to limit the tax deferral opportunities related to passive investments” but added that $50,000 of passive income annually will be exempt.

In detail

Background

In our government’s view, the retention of after-tax business earnings to build a passive investment portfolio within a private corporation creates unfair tax advantages for corporate owners.

This is because corporate tax rates are generally lower than personal rates on business income, facilitating the accumulation of higher earnings within private corporations that can be invested to earn passive income.

The Department of Finance consultation paper released on July 18, 2017, identified alternatives to improve fairness related to the taxation of passive investment income and requested input on the approach to be adopted .

Announcements

Pwc:       Finance Minister Morneau stated that the government will proceed with the previously announced  proposals, except that the new measures will not apply to a $50,000 annual  threshold on passive income. According to Morneau, this threshold is equivalent to $1 million in savings based on a nominal 5% rate of return.

According to Morneau, in 2015, only 3% of Canadian-controlled private corporations had taxable passive income exceeding $50,000.

Morneau also confirmed that the measures targeting passive income will not apply to past investments and the income earned from those investments.

Further, the government has commented that incentives will be in place so that venture capital and angel investors can continue to invest.

Pwc observes

 We await the draft legislation to see which approach the government will adopt with respect to passive income and how the $50,000 threshold will apply. These are expected in the 2018 federal budget.

Some questions are:

  • Will the $50,000 annual income exclusion increase each year to account for the accumulation of the investment income?
  • Does the $50,000 threshold apply regardless of the source of the investment portfolio? Or, for example, does the investment portfolio have to be derived from income subject to the small business tax rate?
    • Will withdrawals from the investment portfolio be considered to be made from past investments, which are grandfathered, or those investments that are not grandfathered?
    • Will the measures take into account investments that may produce “lumpy” annual income (such as one-time capital gains), when the annual average may not exceed $50,000?
    • Is the $50,000 threshold shared among corporations in a group (such as associated corporations)?
    • Is a notional capital amount of $1 million enough if the investments are acting as a retirement fund when compared to commuted values of pensions?

What seems clear is that the measures still will require tracking of grandfathered  and non-grandfathered investments , and a host of rules to properly distinguish passive income and gains,  indirect and in,direct business investments (to avoid unfairly  increasing the related tax).

This will add much added complexity to the compliance burden of private corporations.

The Minister commented that he will continue to listen to feedback when developing the new rules, including specific mention of working with the venture capital and investment sectors to identify  how best to ensure that appropriate incentives for their investments are maintained. Hopefully, our questions, as well as the broader impact on the economy, will also be taken into account.

The takeaway

We will keep you apprised as the “sprinkling” of government communications continue .

The changes make year-end tax planning more challenging. We would be pleased to discuss what the changes  mean for  you and your business.

 

For more information

See our 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”

See our:

  Submission to the Department of Finance

  • press release
  • upcoming Year-end tax planner

 Contact us

Saul Plener

e lower rate applies  to active business income up to the CCPC threshold  of

$450,000

National Leader, Private Company Services Tel:  +1905418  3471

Email

 

 

 

Pwc Canada

Tax Insights: Private contpany tax proposals -More ”sprinkling” of changes – Update # 3
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 announceme nt: Co nverting income into ca pital 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

1ment’s comments indicate that tax changes related to intergenerational transfers are nJlingCanada
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.

 

Takeaway:
Pwc. We will keep you apprised on developments as they occur.
I Canada
they mean for you and your business. Please contact us.

For more information
See our 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 our:

• 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
Email