On October 16, 2017, the federal government announced that the small business corporate tax rate, for Canadian-Controlled Private Corporations (CCPCs) would be reduced to 10 percent effective January 1, 2018, and to 9 percent effective January 1, 2019. The government news release announcing the reduction in the small business corporate income tax rate did not address whether there would be corresponding changes to the dividend gross-up or non-eligible dividend tax credit rate. However, the Department of Finance Canada indicated that the taxation of non-eligible dividends will be adjusted to reflect the lower small business tax rate in order to maintain integration of corporate and personal taxes. More on the small business corporate income tax rate reduction can be found in this backgrounder.
This announcement follows a series of country-wide consultations on measures to change tax planning tools used by private corporations to reduce their personal tax liabilities as explained here. To summarize, the government had released a consultation paper and complex proposed rules and approaches to address certain tax planning involving private corporations on July 18, 2017. The consultation paper, “Tax Planning Using Private Corporations”, looks at strategies that the government believes “inappropriately reduce personal taxes”.
As a result of what they heard during the consultation process (21,000 written submissions), further announcement will be made this week indicating,
1. The cancellation of changes to limit access to the Lifetime Capital Gains Exemption (LCGE). Previously, draft legislation proposed to no longer allow individuals to qualify for the LCGE for capital gains that are realized, or that accrue, before the taxation year in which the individual turns 18, among other things. Currently, the Lifetime Capital Gains Exemption (LCGE) provides a tax exemption for capital gains realized by an individual on the disposition of qualified small business shares up to a lifetime limit of $835,716 in 2017, indexed to inflation.
2. The move forwards with modified proposed income sprinkling measures that set forth that corporations with family members who meaningfully contribute to the business will not be impacted by the proposed measures on income sprinkling. A reasonableness test for adult family members aged 18–24 will be established to decide whether family members are really making contributions to the business. The following will be elements to consider (may be combined):
- Labour contributions
- Capital or equity contributions
- Financial risks, such as co-signing a loan or other debt
- Past contributions in respect to previous labour, capital or risks.
This reasonableness test and other details is explained in this backgrounder (in PDF).
3. That it intends to address unintended consequences of its passive income proposals. In response to feedback from its consultation paper, the government recognizes that private corporations use passive investments to manage personal income and will be looking at ways to improve the proposal and eliminate those negative consequences. Update: On October 18, 2017, Finance Minister Bill Morneau announced that there will be no tax increase on passive investment income below a $50,000 annual threshold as part of new changes to the private company tax proposals. The government confirmed that it will proceed with measures that target the deferral of tax benefits of passive investments within private corporations for income above this new threshold. The Finance Minister said that it intends to release details of these proposed measures as part of its 2018 federal budget, including a technical description of the passive investment income rules.
We will keep you updated on further developments.