Canada: Chapter And Verse On CCPC Tax Changes: Not A Pretty Sight!

Last Updated: October 11 2017
Article by Samantha Prasad

The Liberal government had hinted that it was looking at new legislation with respect to private companies, and this past July they came through on their promises, announcing plans for sweeping changes. Bill Morneau, the Minister of Finance, is doing a cross-country "consultation" tour, which we hear is going over like a lead balloon. Despite government protestations to the contrary, there still may be some changes to the proposals coming down the pike. In the meantime, if you have an interest in a private company, read on to see what all the fuss is about. And hold on to your hat! It's not pretty.

Income Splitting

Currently, the "Kiddie Tax" rules provide that dividends received by persons under the age of 18 from related private companies and income from related partnerships (whether directly or through a trust) would be taxed at the top marginal rate. These rules, under the new proposals, have been substantially extended to apply to all related persons (and not just minors) where such persons receive income from a related private corporation, unless the amount is reasonable in light of the circumstances, having regard to certain criteria. Essentially, spouses, siblings, parents-in-law, and extended family members can be caught under the new rules and would have to pay tax at the top rates.

This Tax on Split Income (TOSI) is expanded to apply not only to dividend income, but also to include interest on loans, taxable capital gains, if the income on the shares would have been split income, as well as second-generation income if it is earned on income that was itself split income (so it's a compounded effect).

I noted earlier that there is a "reasonableness test." Essentially, in order for income not to be subject to this top tax rate, the income must be reasonable, i.e., it cannot be more than what would be paid to an arm's-length person for the same activities provided to the company. Factors to consider include actual work performed, the capital contributed for the shares issued to such persons, risk assumed by them, and compensation for services already completed. Note that the test is more stringent for persons between the ages of 18 and 24.

The short answer is that if a family member did not contribute money to the company or is not involved in the company's operations, then any dividend income paid to them will be subject to the top marginal tax rates. This will eliminate the ability to income split with any family member who is not involved in the business.

There is a specific exemption for minors and adult children who have income due to the death of a parent, or for persons that are disabled or attending full time school.

Capital Gains Exemption

Currently, every Canadian resident (regardless of age) is able to claim the lifetime capital gains exemption on the sale of shares of a qualifying private corporation (which gives you the first $800,000 – as indexed – tax-free). There are three proposed changes to these rules:

  1. Persons under the age of 18 are no longer able to claim the capital gains exemption. Specifically, any gains accrued before the person turns 18 will not be eligible for the exemption. So, even if a person is 19 years old, and the value of his or her shares accrued while such person was a minor, they could not claim the exemption.
  2. As a continuation of the tax on split income discussed above, if any amount of a taxable capital gain is included in split income, it will not be eligible for the capital gains exemption. So, if a family member is not involved in the company's business, then arguably the exemption is not available.
  3. Any capital gains accrued during the time that shares were held by a trust will no longer be eligible. This is a big change and will affect many family corporate structures where estate freezes were put in place with family trusts.

These new rules will come into effect in 2018; however, there is some transitional relief. If you file an election on your personal tax return by the due date for 2018, you can take steps to crystallize the capital gain and claim the capital gains exemption before the end of 2018. This will bump up your cost base by the capital gains exemption amount, so any future sale will benefit from a reduced capital gains tax.

Capital Gains within a Corporate Group

New measures were announced to eliminate the ability to pull out cash from a corporate group by way of a capital gain triggered within the corporate structure, rather than paying a dividend and being subject to a divided tax (which is a higher rate than capital gains).

Essentially, the current section 84.1 of the Income Tax Act (which re-characterizes capital gains as deemed dividends) will be expanded under the new proposals to deny the ability to trigger a capital gain at the corporate level and pay out a tax-free capital dividend to the shareholders. The new rules also include an anti-avoidance rule to deal with surplus stripping transactions through the use of capital gains to apply to situations that might not be captured by the newly expanded s. 84.1. Unlike the proposals for TOSI and the capital gains exemption, these new rules are to apply as of July 18, 2017.

Accumulating Funds in Private Corporations

One of the government's goals was to prevent the use of tax deferrals through the use of corporations, specifically on income derived from passive investments held in a corporation. Although the new proposals do not include actual legislation (like the first three proposals discussed above), the government outlined, at a very high level, certain options aimed at reducing the ability to defer tax on such types of incomes. These include:

  1. Investment income earned by a corporation will be taxed at the highest personal federal tax rate (33%) with the elimination of the refundable tax mechanism.
  2. Capital gains on such income will still be subject to 50% tax; however, the tax-free portion on such capital gains can no longer be paid out tax-free to an individual shareholder.
  3. Dividends taxed to individual shareholders will be based on the source of the funds (i.e., whether income was taxed at the small business rate or at the general corporate rate).

Keep in mind that the government did not announce any draft legislation regarding the passive income tax proposals, so we are still unsure as to what they are actually proposing or how they are going to go about it. All we know is that they are focusing on ways to reduce the ability for retained earnings that are reinvested to take advantage of the lower corporate tax rates. The government has announced a consultation period, and as I mentioned the Minister of Finance is facing the wrath of small business owners everywhere on his cross-country "consultation." Whether this will change anything or not remains to be seen.

For now, be proactive. If you are a shareholder in a private corporation, and/or  your family members are also shareholders, then I would suggest you speak to your tax advisors to understand how these rules will affect you and what you may be able to do to minimize the effects.

Previously published in The Fund Library on ​October 3, 2017 by tax and estate planning lawyer,  Samantha Prasad.​​​​

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.

Samantha Prasad
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.