Further to our earlier article regarding the Federal Government's proposals to amend the Income Tax Act, on October 19, 2017, the Department of Finance announced that it would not be proceeding with the last of its proposed changes, namely measures dealing with the conversion of income into capital gains ("anti surplus-stripping proposals"). "Surplus stripping" refers to the concept of the extraction of corporate surplus in a manner that would convert income taxable at higher tax rates (such as dividends) to income taxable at lower tax rates (such as capital gains).
As part of its explanation for abandoning these proposals, Finance stated that "the measures could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of businesses". Although the abandonment of the anti surplus-stripping proposals should allay the concerns expressed by the tax community and business owners regarding the significant tax ramifications that these measures would have raised, it appears that this issue will continue to be considered by Finance. The Press Release also indicates that in the coming year, "the Government will continue its outreach to farmers, fishers and other business owners to develop proposals to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system".
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