Canada: Update: Tax Planning For Private Corporations And Shareholders

The Times They Are A-Changin'

The title to Bob Dylan's 1964 song is an appropriate way to describe the impact of newly released proposed tax rules.  On July 18, 2017 the Government released draft legislation that will have a significant impact on tax planning for private corporations and their shareholders.

The draft proposals invite public consultations by October 2, 2017 and, due to the nature of the proposals, will undoubtedly result in significant feedback and (possibly) some amendment.  However, whatever the result of the consultations, the Government has made their intentions clear and all private businesses should be prepared for significant changes.  The Crowe MacKay tax team has summarized the changes below.

Income Splitting

Income splitting refers to the transfer of income between family members to effect a lower overall tax rate.  A commonly employed method of income splitting is having non-active family members own shares of a corporation (directly or indirectly) that carries on a business that is run by an active (in the business) family member.  The corporation pays a low rate of corporate tax on its business income (for example 15% on the first $500,000 of active business income) leaving behind $0.85 of every $1.00 earned to be paid as dividends to family members in low tax brackets.  The result being a reduced tax rate compared to if the income was earned directly by the active family member.

In 1999 the concept of tax on split income ("TOSI") was introduced whereby family members under the age of 18 are currently taxed at the highest marginal rate on dividends received from a family corporation.  This essentially curbed the practice of splitting income with minors but still allowed for income splitting with adult children which was beneficial to the extent parents were still funding them (e.g. while in post secondary education).

The proposed rules extend TOSI to all related individuals regardless of age starting in 2018.  This includes spouses, adult children and other family members.  This means that any dividends paid to an individual from a corporation that carries on a business in which a related individual is active, could be subject to tax at the highest marginal rates.  The most significant impact of this change will be restricting dividends paid to a spouse who is not active in the business.

Income will not be subject to TOSI to the extent the amounts are considered "reasonable".  The reasonability test applies different parameters for related individuals aged 18 to 24 and related individuals aged 25 and over (note all amounts paid to individuals under 18 remain subject to TOSI).  How the reasonability parameters will be applied remains to be seen but it is clear that the days of paying discretionary dividends to family members are soon to be over.

Lifetime Capital Gains Exemption ("LCGE")

The LCGE is a cornerstone of the Canadian tax system for owners of private corporations allowing for a tax-free capital gain on the sale of shares (up to $835,000 for 2017).  The proposed amendments to the LCGE rules result from the same perceived abuses as addressed in the income splitting changes.  Effective in 2018 the changes can be summarized as follows:

  • gains realized, or accrued, in the hands of an individual while under the age of 18 are not eligible for the LCGE
  • gains on property held by trusts are not eligible for the LCGE

    • spousal trusts, alter ego trusts and certain employee share ownership trusts (where employee is arm's length) are excluded
    • applies regardless of whether the trust disposes of property and allocates gain to a beneficiary or rolls the property to a beneficiary who then disposes of it
  • gains on shares of a corporation that would be subject to TOSI are not eligible for the LCGE

    • this excludes "reasonable" gains which is determined based on the same tests as for reasonability of amounts paid to which TOSI may apply

These changes will be significant to many family owned businesses as holding shares of a private corporation through a family trust could increase the overall tax burden upon sale of the business.  The changes severely restrict the use of family trusts as part of the ownership structure.

The proposals do provide some relief in the form of an election that can be filed for 2018 to allow accrued gains to be realized on shares otherwise eligible for the LCGE.  An individual (including a trust) would be eligible to make the election to trigger a capital gain and claim the LCGE to the extent the shares otherwise qualify.  However, an individual under the age of 18 cannot elect on shares of a private corporation nor can a trust to the extent the resulting gain is to be allocated to a beneficiary under the age of 18.

Passive Investment Income Inside a Corporation

The Government is also concerned about the deferral of tax that is achieved by having income taxed inside a private corporation at low business income tax rates and invested to generate passive investment income.  No draft legislation has been released on this matter but the Government is asking for feedback regarding a couple of proposed options:

  • the 1972 Approach
  • Deferred Taxation

The 1972 Approach would introduce an additional refundable tax on preferentially-taxed business income when the income is retained and used to fund passive investments.  For example, assuming the combined Federal and provincial small business tax rate is 15%, the new additional refundable tax would be 35% bringing the total rate to 50%.  If the passive investment assets were sold and used to purchase active business assets the 35% would be refunded.  It would also be refunded if the passive investment assets were sold and the proceeds distributed as dividends.

The Deferred Taxation approach would not result in a change in corporate tax rates but would not provide a refund of otherwise refundable taxes on passive investment income when earnings used to purchase the passive investment assets were taxed at lower corporate tax rates on business income. The Government is also considering changing the tax treatment of dividends received by shareholders of private corporations based on whether the corporation used its retained business income to purchase passive investment assets.

It remains to be seen which approach is followed.  But, regardless of which  is chosen, the tax deferral provided by retaining business income in private corporations looks to be disappearing.

Conversion of Income into Capital Gains

The current personal tax rate environment has spawned planning that results in the taxation of corporate surplus at capital gains rates instead of dividend rates.  Draft legislation has been released that expands upon existing rules that are designed to curb this type of planning and essentially the new rules operate to convert capital gains triggered on a disposition of shares to a related party to dividends which are subject to higher personal tax rates.

The most significant immediate impact of these changes is the shutting down of post-mortem pipeline planning.  It should be noted that these changes are effective immediately.

More details on the changes will become available as tax practitioners have the opportunity to digest the full scope of the changes.  It is clear though that tax planning for private corporations and their shareholders will look very different beyond 2017.

'Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

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.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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