Canada: Overview Of Proposed Changes To The Taxation Of Income Derived From Private Corporations

Last Updated: February 1 2018
Article by Nicole Woodward

In the March 2017 Federal Budget, the Department of Finance announced that it was studying certain aspects of the taxation of private corporations and that a consultation paper would be released later in the year.

On July 18, 2017, the Department of Finance released the consultation paper along with legislative proposals ("Proposals") affecting tax planning involving private corporations. In particular, it proposed restrictions on income splitting, the ability to multiply the lifetime capital gains exemption, the ability to convert income into capital gains ("surplus stripping"), and passive income held by private corporations. Due to considerable backlash in the months following from Canadian small business owners, farmers, fishers, professionals, and experts, Minister Morneau advised over a series of announcements in October 2017 that the government would not be proceeding with proposed measures in relation to the multiplication of the lifetime capital gains exemption and surplus stripping transactions, but it would be proceeding with proposals related to income splitting opportunities available to private company shareholders and proposals related to passive income held by private corporations.

On December 13, 2017 the government introduced simpler measures related to income splitting and provided updated draft legislation, and advised we could expect to see more details in relation to passive income held by private corporations in the 2018 Federal Budget.

Income Splitting

Income splitting is a tax planning arrangement where income that would otherwise have been taxed as income of a high-income family member is transferred to and taxed as income of a lower-income family member. Effective January 1, 2018, the government eliminated some income splitting strategies used by small businesses to sprinkle income to family members who are not directly involved in the business.

The "tax on split income" rules (also known as the "TOSI" rules or "Kiddie Tax" rules) provide that dividends received by a person under the age of 18 from related private corporations and income from related partnerships are taxed at the highest marginal rate. In the Proposals, the government proposed extending the Kiddie Tax rules to include all family members or "related persons", unless the situation falls under certain exceptions determined by applying complex set of criteria. After considerable criticism in the months that followed, the government introduced simplified measures in December 2017, including a series of "bright-line" tests to determine more easily whether a family member (a spouse or child) is actively engaged in the business. A family member will be eligible to receive income from the business and be taxed at his or her marginal rate if:

  1. the family member is aged 25 or over and owns at least 10 per cent of the votes and value of the private corporation (that is not a professional corporation) that derives less than 90% of its revenue from the provision of services;
  2. the family member is aged 18 or older and has made a "meaningful direct labour contribution" – defined as 20 hours per week of labour contribution – to the private corporation in the year or any five previous tax years;
  3. the family member is the business owner's spouse, provided the business owner meaningfully contributed to the business and is aged 65 or older;
  4. the family member is aged 25 or older and does not meet any of the exclusions in (1) - (3) above, but passes the "reasonable test", based on certain criteria; or
  5. the family member is aged 18 to 24 and does not meet any of the exclusions in (1) - (3) above, but passes a stricter application of the "reasonable test", based on certain criteria.

The reasonableness test will require the family member to show that the income or dividend received was reasonable based on the person's labour contribution to the business, capital contribution to the business, and business risks assumed by them. If the reasonable test is not met, the amounts received by the family member will be taxed at the highest personal income tax rate.

The government also introduced further exemptions from TOSI, in relation to:

  1. the gain received by a family member which results from the disposition of shares of a qualified small business corporation or farm property;
  2. gain that is realized by an individual on his or her death;
  3. an amount that is derived from property transferred to a family member as part of a settlement upon the breakdown of the person's marriage or common-law partnership;
  4. dividends that represent a reasonable return on a family member's capital contribution to the business; and
  5. compound income.

While legislation is still in draft form, the government has announced that once passed, the effective date for the income splitting rules is January 1, 2018. Fortunately, taxpayers will have until the end of 2018 to make any changes to the structure of their corporations to meet the reasonableness test.

Lifetime Capital Gains Exemption

The government will not be moving forward with its proposal to limit access to the Lifetime Capital Gains Exemption ("LCGE"). In the Proposals, the government announced its intention to constrain the eligibility to limit the ability of family members to multiply access to the LCGE, including eliminating the exemption for any gain accrued while a person was a minor or while the shares were held by a trust. Minister Morneau has since confirmed the government will not be proceeding with this portion of the Proposals.

Conversion of Income into Capital Gains ("Surplus Stripping")

The government will not be moving forward with proposed measures relating to the conversion of income into capital gains. In the Proposals, the government announced its intention to eliminate the ability for certain individuals to pull cash out of a corporation by way of a capital gain triggered within the corporate structure, rather than paying a dividend and being subject the higher tax rate applied to dividends. Minister Morneau has since confirmed the government will not be proceeding with these proposed measures.

Passive Income Held by Private Corporations

In the Proposals, concern was expressed about tax deferrals on passive income held by private corporations and suggested options for reducing the ability to defer such tax. While no draft legislation has yet been proposed, in October 2017 the government advised that they will ensure that business owners will have the flexibility to save for contingencies such as lean years or sickness, or for retirement, and provided assurances that past investments and income thereon will be protected. Details and proposed legislation will be included in the 2018 Federal Budget. Once passed, these rules will apply on a go-forward, rather than a retroactive, basis.

Other Matters

One additional item worthy of note is the Ministry's reduction of the small business tax rate from 10.5 per cent in 2017 to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019.

Our team of tax lawyers at Dentons can assist you and your business in navigating these complex tax planning issues.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions