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Canada’s Department of Finance Backtracks on Controversial Elements of Recent Tax Proposals

Corporate Tax Planning
Personal Tax Planning
October 21, 2017

Earlier this year, we blogged about the federal government’s proposed tax changes. This week, the Department of Finance Canada clarified some aspects of the proposed measures, including providing more information about some of the most contentious elements of the tax-reform plan. The news came in the wake of significant public outcry and anger across the country, particularly from small business owners.

The Modified Passive Income Proposal

Finance Minister Bill Morneau clarified that the government’s original proposal on passive-investment income would be significantly watered down.

Important features of the modified proposal:

  • The new rules will not apply to existing savings and/or income from those savings;
  • For new savings, the system will now allow $50,000 of passive investment income to be sheltered before the higher tax rate is imposed;
  • Passive investment income includes vehicles such as stocks, bonds, and rental real estate;
  • This is equivalent to $1 million in savings at a nominal 5% rate of return;
  • Up to $100,000 of capital gains from new savings annually will be taxed under existing rules;
  • If investment income from new investments exceeds $50,000 annually, the new tax rates will apply.

The largest backlash following the government’s original tax-proposals came from entrepreneurs, doctors, lawyers, and other professionals and small business owners who would have been most negatively affected by the changes. The Minister hopes that the measures will help business owners save money for future needs or emergencies, while curtailing the practice of stashing money in privately held firms as a tax planning strategy.

Morneau has noted that there is between $200 billion and $300 billion in assets currently in the passive investment accounts of just 3% of all private corporations in Canada (approximately 29,000 companies of a total of 1.8 million private corporations). Any tax increases stemming from passive investment income is intended to affect only this small percent of the most wealthy privately owned corporations.

Draft legislation will be released in the 2018 Budget, and will include a full technical description of how the passive investment income threshold will be applied.

Capital Gains Exemptions

Morneau announced that the government will also no longer be creating limits on who can access the lifetime capital gains exemption (currently, the lifetime capital gains exception under Canadian law allows shareholders to sell the shares of their company and not pay taxes on lifetime gains of up to $836,000.)

In addition, the government will not be moving forward with previously announced changes that would have prevented retained earnings from a private corporation to be extracted as a capital gain rather than a dividend.

These announcements followed concerns voiced by business owners who feared that the proposed measures would inhibit the intergenerational transfer of businesses and would increase uncertainty about taxes upon death. The new changes are intended to assist entrepreneurs hoping to pass on their business to their children.

Other Changes

Other changes announced this week included:

  • A reduction in the small business tax rate to 9% over two years;
  • A promise to simplify the previously proposed limits on “income sprinkling”.

Additional clarifications and expected to be announced, and we will continue to follow developments in this regard, and provide updates as they become available. In the interim, if you have questions about how these proposals and potential changes will affect your current tax plan contact Feigenbaum Law.  We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.


Tagged: Canadian tax, capital gains, income sprinkling, passive income, tax reform