Canada: Important Proposed Amendments To The Taxation Of Private Corporations


In its 2017 Federal Budget release, the Federal Government noted a continued concern with tax planning strategies involving private corporations.  While no new measures or amendments to existing rules were released as part of the 2017 Federal Budget, Canadian tax practitioners had generally understood that proposed amendments would be forthcoming.  These amendments were announced by the Minister of Finance this past Tuesday, July 18, 2017.  They constitute an important and, in some cases, potentially fundamental shift in the taxation of Canadian private corporations and their shareholders.

The Federal Government has called for submissions regarding the new proposed amendments and, more generally, regarding three tax planning strategies or approaches which make use of private corporations:

  1. The "sprinkling" of income (for example, through the issuance and payment of dividends or other forms of income to family members) using private corporations. The Federal Government is concerned that such planning results in otherwise higher income individuals paying less than their fair share of tax by diverting what would otherwise be their own taxable income to family members who are likely subject to lower marginal tax rates;
  2. Holding a passive investment portfolio inside a private corporation, which may provide the owners of the private corporation with certain tax advantages as compared to investment portfolios that are owned by taxpayers personally; and
  3. Converting a private corporation's regular income into capital gains, which can reduce the amount of tax payable by taking advantage of the lower tax rates on capital gains.

The language used in the Government's release is strong and takes particular aim at these strategies and approaches, which it blames for causing unfairness within the Canadian tax system.  In this respect, the Federal Government particularly compares certain tax benefits available to a private corporation and its principals to the case of income earned personally by an employee.  The Federal Government highlights and emphasizes the potential difference in overall tax payable by the employee and the corporate principals in respect of the same amount of income as reason for the amendments proposed (and consultations requested) on Tuesday and the need to introduce a greater measure of "fairness" into the taxation of Canadian private corporations.

Income Sprinkling

The Federal Government takes the position that income "sprinkling" arrangements allow high-income individuals to opt out of the personal income system to their own advantage. Three particular measures have been proposed by the Federal Government to address and remedy its concerns:

  1. Extension to the tax on split income ("TOSI") rules: Currently, the TOSI (often referred to as "kiddie tax") applies only to children under the age of 17. The rules generally result in income derived from a private corporation and paid to children being subject to the highest marginal tax rate in the province of the children's residence.  Measures are proposed to broaden the TOSI to apply to adult individuals resident in Canada who receive income from the business of a related individual.

A "reasonableness" test is also proposed to determine whether income received by an individual who is otherwise "connected" to a business will be subjected to the rules.  This reasonableness test will, inter alia, consider actual labour and capital contributions made by family members to a business in determining whether the income being paid to them is sufficiently "arm's length".  Individuals aged between 18 and 24 will be subject to a more stringent test than those above the age of 24.

  1. Constraining the Multiplication of the Lifetime Capital Gains Exemption ("LCGE"): The LCGE is generally available to be claimed by the owners of shares that meet the requirements for "qualified small business corporation shares." By claiming the LCGE, a business owner may reduce the overall capital gains tax payable on the disposition of "qualified small business corporation shares" to the full extent of the available LCGE during the year in which the disposition occurs.  In 2017, the LCGE limit is $835,714.

Conventional planning included the introduction of a family trust as part of a business family's overall tax planning to own the common or growth shares of a small business corporation.  Upon a sale or disposition of the shares, the trust would realize a capital gain but could allocate the gain to the beneficiaries of the trust (being, generally, members of the business family) in order for the beneficiaries to utilize their available LCGEs.  The overall tax paid by a business family on the disposition of the small business corporation shares would be accordingly reduced.

The Federal Government questions the overall fairness of such planning.  New measures are, therefore, proposed which would:

a) Apply an age limit in determining LCGE eligibility. Individuals would no longer qualify for the LCGE in respect of capital gains realized before the taxation year in which they attain the age of 18;

b) Introduce a "reasonableness" test that would be applied to determine whether the LCGE may be claimed by an individual in respect of a realized capital gain. This test would, in general, be the same as that which applies to the TOSI measures described above;

c) No longer permit individuals to claim the LCGE in respect of capital gains that accrue during a period in which a trust holds the property. While an exception would be provided for capital gains that accrue on property held by a spouse or common law partner trust, as well as certain employee trusts, the multiplication of the LCGE through a trust would no longer be permitted; and

d) Provide a special election to individuals for their 2018 taxation years to crystallize their available LCGEs up to the start of that year.

  1. Supporting measures to Improve the Integrity of the Tax System: In addition to the above-outlined measures, the Federal Government also proposes that the requirement to issue T5 returns in respect of interest payments be extended to partnerships and trusts in much the same manner as they presently apply to corporations. It follows that trusts which are the recipients of debt (such as prescribed rate loans) would be required to issue a T5 return to the lender in respect of the interest payable on such debt.

Holding Passive Investments inside a Private Corporation

The Federal Government suggests that planning which involves holding passive investments within a private corporation creates a financially advantageous situation for the owners of the private corporation as compared to other taxpayers.  According to the Government, this is "mainly due to the fact that corporate income tax rates, which are generally much lower than personal rates, facilitate the accumulation of earnings that can be invested in a passive portfolio."  The Government suggests that the current system in place "does not achieve its objective of removing incentives to hold passive investments within a corporation in a broad range of [...] situations".

Although the Federal Government does not, at this time, propose any specific amendments to the Income Tax Act (Canada) to address this perceived unfairness, it does discuss certain methods which could be applied to address and potentially remedy its main concerns.  Some of these methods may constitute a fundamental shift in the manner in which private corporations are taxed in respect of passive income.  Consultations are requested regarding the possible methods suggested by the Federal Government.  It is expected that groups within the tax and private client services industries will be making submissions to the Federal Government in the coming weeks to voice their views and concerns.

Converting Income into Capital Gains

Section 84.1 of the Income Tax Act (Canada) is an anti-avoidance rule that generally applies when an individual sells shares of a Canadian corporation to another Canadian corporation on a non-arm's length basis and the individual receives non-share consideration (e.g. cash) for the shares in excess of the greater of two amounts: the adjusted cost base of the shares to the individual and the shares' paid-up capital.  The Federal Government is concerned that section 84.1 can be avoided and that tax payable can be thereby reduced by converting amounts that would otherwise be paid as dividends or salary to capital gains, which are subject to a lower rate of tax.

The Federal Government accordingly proposes that section 84.1 be amended to prevent taxpayers from using non-arm's length transactions that "step-up" the cost base of shares of a corporation in order to avoid the application of section 84.1 on a subsequent transaction. This will be achieved by extending the current rules in subsection 84.1(2) to cases where cost base is increased in a taxable non-arm's length transaction. The Federal Government also proposes that the Income Tax Act (Canada) be amended to add a separate anti-stripping rule to counter tax planning intended to circumvent the application of Income Tax Act (Canada) provisions which are otherwise designed to prevent the conversion of a private corporation's surplus into tax-exempt capital gains.

Studying the New Proposals and Next Steps

The amendments to the Income Tax Act (Canada) proposed by the Federal Government, as well as the potential methods to be applied to eliminate the perceived advantage available to taxpayers who hold passive investments in a private corporation, are detailed and complicated.  Miller Thomson LLP's Corporate Tax and Private Client Services teams are presently engaged in a detailed review of these proposals and look forward to the opportunity of collaborating with key industry organizations on submissions to the Federal Government.  We will be providing you with additional information, analysis and insights in due course after we have had an opportunity to study and consider more carefully the Federal Government's proposals.

In spite of the proposed new measures announced by the Federal Government on Tuesday, there remain very legitimate and important reasons for tax and legal planning involving the use of private corporations and trusts.  Although the Federal Government's proposals may result in the loss of certain previously available tax advantages, other key benefits appear still to be available.  Most notable among these benefits is the use of family trusts to facilitate the tax-deferred, inter-generational transfer of private corporation shares to family members (often children and grandchildren) who are resident in Canada—a key component of many business succession plans.  The Federal Government has also in no way eliminated the benefits provided to private corporation owners who engage in common "estate freeze" transactions.  These transactions may also be critical to business succession plans and to a business family's overall tax planning.

Speak with your Miller Thomson LLP Tax and Private Client Services Advisor

Please contact your Miller Thomson LLP Tax and/or Private Client Services lawyer if you have any questions regarding the Federal Government's proposals and how they may impact you or your business, corporation or trust.

As discussed, we will be studying the proposals in greater detail and will be providing additional information, insights and analysis in due course.

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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.