Category : blog
As you may have heard in the news, the government is proposing tax changes that affect private corporations. I have attended a number of town hall sessions and seminars on the proposed changes and have summarized the impacted tax planning areas:
Business owners currently can split income to family members to reduce the overall family tax burden. The government wants to restrict this by expanding the ‘kiddie tax’ rules and preventing dividends paid to children at a lower tax rate. More specifically, the government wants to restrict the ability to pay salary or dividends to adult children between the age of 18 and 24 by extending the Kiddie Tax rules ( “Tax on Split Income” (TOSI) ). Furthermore, a reasonableness test will be introduced to determine if the amount received by the family member is commensurate with the labour and capital contributions by the family member.
Holding Passive Investments Inside a Private Corporation:
The government is planning to change the rules to prevent the use of corporate tax deferrals to hold passive investments inside a corporation. The existing rules allow shareholders to decide when they receive dividends allowing them to control when the personal taxes are paid. This tax deferral was intended by the government as an incentive for Canadian controlled private corporations to invest within their business. The government opines that the current system allows corporations (paying tax at a lower rate) to retain cash within the corporation and invest the excess funds at an unfair tax advantage. They have not determined what the specific rate will be, but are looking at a specific tax rate for passive investments.
Converting Income into Capital Gains:
The Government has proposed new measures which seek to eliminate tax plans that convert dividend income into low taxed capital gains. Within the tax rules is the theory of integration in which income earned in a corporation is taxed at the corporate level and once again when the individual shareholder receives a dividend. The after-tax amount in the individual’s hand after removing the funds from the corporation should be the same as if the individual earned the funds directly as a salary. The government is concerned with the ineffectiveness of integration in situations where corporate surpluses are paid out in the form of tax-exempt or lower taxed income. The legislation has been amended to eliminate this conversion and a new anti-avoidance rule will be added.
Multiplication of the Lifetime Capital Gains Exemption (LCGE):
Currently, corporations can use family trusts to have multiple LCGE limits for multiple family members. There are 3 proposed measures in this category:
- The LCGE is no longer available for taxpayers in the year before they attain the age of 18
- Gains accrued when the property was held by a trust would no longer be eligible for the LCGE
- If the gain from the property is included in an individual’s split income, then the LCGE would not be eligible
As the legislation is finalized, I will provide a further update. In the meantime, if you have any questions, please contact myself or the staff.