(The full version of this bulletin was originally published on Fasken.com – " The Federal Government's Proposals Targeting Private Corporation Tax Planning" – August 3, 2017.)
On July 18, 2017 (the "Consultation Date"), the Minister of Finance (Canada), the Honourable William Morneau, released the Government's proposals to address tax planning commonly used by private corporations and their owners in the form of a paper (the "Consultation Paper") and draft legislation amending the Income Tax Act (Canada) (the "Tax Act") to implement certain of the proposed measures.
The Government addresses three broad issues in the Consultation Paper:
- sprinkling income using private corporations;
- holding a passive investment portfolio inside a private corporation; and
- converting a private corporation's regular income into capital gains.
Selected proposals and tax measures are detailed below.
Details of the Proposed Tax Measures
Income Sprinkling
Background
The Consultation Paper notes that the Government has imposed a progressive personal income tax system with five marginal tax rates ranging between 15 percent and 33 percent that apply at different taxable income thresholds. The Government is concerned with arrangements that effectively transfer income that may otherwise be taxable in the hands of a high-income individual to a family member subject to lower tax rates resulting in lower tax receipts for the Government ("income sprinkling").
The Tax Act currently has a number of provisions that deny or limit the potential benefits of income sprinkling, but the Government believes that additional measures are necessary with a particular focus on investments in private corporations.
Proposed Tax Measures
The measures proposed by the Government fall into three categories:
- extension of the tax on split-income ("TOSI") provisions;
- restricting claims under the lifetime capital gains exemption (the "LCGE"); and
- new tax reporting obligations applicable to trusts and partnerships.
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