Canada: Private Corporations - Fall Update

Last Updated: February 2 2018
Article by Samantha Prasad

A few months ago, I wrote about the cruel summer I was having trying to understand, explain and rationalize the new tax rules about private companies released on July 18. I had noted that there was a consultation period, which ended on October 2. My hope was that the government would listen to the public and take cues from the thousands of submissions (about 21,000 submissions, in fact).

Well, it appears that public opinion and feedback from constituents may have had some effect. Since October 2, 2017, there have been a number of releases by the Department of Finance, most of which are quite welcome. But before I summarize the changes as announced, let me recap the original proposals from July.

What was proposed...

Tax on split income rules (TOSI): The current "kiddie tax" rules are to be expanded to apply to all related persons (and not just minors, so that all family members who receive dividends from a family corporation will be subject to the top federal tax rate (unless such amounts paid are reasonably in light of the services or contributions (including financial) they provide to the company).

Capital Gains Exemption:

The availability of the capital gains exemption on a sale of shares was to be restricted as follows:

  1. Minors could no longer claim the exemption.
  2. If a taxable capital gain was included in the split income rules, then the exemption was not available.
  3. Trusts can no longer claim the exemption, and any gains accrued during the time that shares were held by a trust will no longer be eligible.

There was some transitional relief that allowed you to claim the exemption in a narrower scope until the end of 2018.

Surplus stripping: Effective July 18, 2017, capital gains triggered at the corporate level in certain circumstances would be re-characterized as a taxable dividend (and there would be no addition to the capital dividend account, which lets you pull the tax-free portion of a gain out of the company tax-free).

Passive Income: Although actual legislation was not announced on this point (like the others), Finance announced its intent to tax investment income earned by a corporation carrying on an active business at a top federal tax rate of 33 per cent

...is modified (sometimes)...

On October 16, the Department of Finance made three announcements:

  1. The federal small business tax rate (currently at 11 per cent) is to be reduced to 9 per cent effective January 1, 2019. It will drop to 10 per cent on January 1, 2018. This tax rate applies to the first $500,000 of active business income each year for a company (to be shared among associated corporations).
  2. With respect to the proposed tax on split income (TOSI), the government announced that it would be making changes to the proposals in order to simply them.

Although it did not release amended legislation, it did provide some examples as to how it would apply the rules. So, while not backing down from this proposal, the government stated that it will ensure the rules will not impact businesses to the extent that there are "clear and meaningful contributions" by the family members to the business. Reasonableness tests will be introduced as part of the revised legislation, and family members will need to have made contributions to the business through any combination of the following:

  1. Labour contributions
  2. Capital or equity contributions (i.e. actual financial contribution)
  3. Taking on of financial risks of the business (i.e. co-signing a loan or other debt), and/or
  4. Past contributions of the above.

The take-away from this announcement was that the government was going to try to reduce the compliance burden in trying to establish how a family member could make a contribution.

New revised legislation is to be released this fall (which means that technically they could have until December 20!). The changes are still to take effect January 1, 2018.

3. Happily, the government fully retracted the capital gains exemption proposals and announced it will not proceed with these measures. The reasoning behind this backtrack, as provided by them, was that it would have an impact on intergenerational transfers of family businesses. However, it is not clear how this announcement will impact the capital gains exemption proposals to the extent they are caught by the TOSI rules.

...and modified again (sometimes)

On October 18, 2017, Finance made another announcement that also eased the application of the July proposals, but this time in relation to the passive income rules. Although the government reiterated its intent to limit tax deferral opportunities as they relate to passive investments in a corporation, it did concede the following:

  1. Any past and current investments (and future income earned thereon) in a corporation as at the date the new rules are announced will be grandfathered, and so will not be subject to the new rules.
  2. The first $50,000 of passive income will not be taxed at the top rates.
  3. It will allow for contingency funds or reserves, for the purchase of equipment, business expansion or hiring and training of staff.
  4. Incentives will be in place for venture capital and angel investors to allow them to continue to invest "in the next generation of Canadian innovation."

It also announced that new legislation will be released in the 2018 Federal Budget, such that the proposals will come into effect as of that date.

And the next day, on October 19, 2017, more good news was released by the government: It announced it was not going to move forward with the antisurplus stripping rules, which would have converted capital gains into taxable dividends. However, it did note that it would continue to consult with farmers, fishers and other business owners to develop proposals that would better accommodate intergenerational transfers. This means that we have only had a stay of execution for now, as the issue of surplus stripping is still on their agenda.

Summary

We all talk about the power of the people and how it can change the world. In this instance, we saw the effect it had on the Canadian tax landscape. In light of the various roll-backs and backtracking by the government since the consultation period ended, one would think that the government should have taken the time to consult with the tax and business community before moving forward with such sweeping proposals. Had it done so, we would not have had the headaches and anxiety we have had since mid-July. Although the changes announced in October may not be a complete victory (we still have to wait for the actual legislation to be released before the end of the year and with the 2018 Federal Budget before I relax a bit), it definitely is a step in the right direction.

Originally published in The TaxLetter

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 Mondaq.com.

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

Authors
Samantha Prasad
Similar Articles
Relevancy Powered by MondaqAI
Moodys Gartner Tax Law LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Moodys Gartner Tax Law LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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