Those of us following the Government of Canada's proposed tax changes since mid-July, experienced quite the wild ride last week. Personally speaking, there were highs and lows, days where my head was spinning thinking of the form the new proposed changes may take, and, of course, the usual influx of emails from clients and colleagues asking "so what does this all mean?"
While I wish I had definitive answers, draft legislation was not released concurrently with last week's announcements and the six New Releases and seven Backgrounder Briefings published by the Department of Finance were short on details. That being said, I will try to summarize last week's announcements below:
- Dividends paid out of a private corporation to family members will only be permitted to the extent that a family member can demonstrate that they have made a "meaningful contribution" to the business based on any combination of: labour contributions; capital or equity contributions to the business, taken on financial risks of the business (such as co-signing a loan or other debt), and/or past contributions in respect to previous labour, capital or risks.
- Tax planning, which multiplies the Lifetime Capital Gains Exemption and access to the exemption by any shareholder regardless of age, appears to be okay again and is not threatened by the government.
- The federal small business corporate tax rate will decrease to 10 per cent on January 1, 2018 and then to nine per cent on January 1, 2019 (currently 10.5 per cent).
- The Government will move ahead with measures limiting the amount of passive income that can be earned in a private corporation where the source of the funds was from a business. The details for this new regime will be revealed in Budget 2018. The Government has promised that any existing investments and the income earned on those investments will not be subject to the new regime.
- Once the new regime is enacted, there will be a $50,000/annum investment income threshold which will be protected from the new tax measures on passive income earned by a private corporation.
- "Pipeline" planning appears to still be a viable method to avoid double taxation in situations where "hard" cost base exists (*).
- Tax-free capital dividends and shareholder loans can continue to be paid out of a private corporations with no concerns, regardless of how they originated (*).
- The Government will ensure incentives are maintained so venture capital and angel investors can continue to invest in the next generation of Canadian innovation (At this juncture, we are not sure what this means specifically?)
- On Tuesday, October 24, 2017, Morneau will table the Fall Economic Statement where "certain tax advantages for the "wealthy few" will end." (Although cryptically worded in the press releases, I do expect more tax changes to be introduced at this time.)
- If you are elected a Member of Parliament, make sure you put all of your personal assets in a blind trust (Too early, perhaps? Some would say no.)
(*) These can be inferred with some degree of certainty from the briefings released by the Department of Finance this week; however, it is still recommended that you speak to a professional before considering any actions.
As always, if you have any questions or concerns about the proposed tax changes and how they may impact you, please feel free to contact me. I will keep you posted as further developments take place next week.
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