On July 18, 2017, federal finance minister Bill Morneau released a policy paper, “Tax Planning Using Private Corporations,” which outlined proposed legislative changes that are significant.
The government allowed for a 75 day consultation period with comments requested by October 2. CPABC organized a roundtable session in Kelowna on September 11 with 15 local members participating. This consultation was facilitated by Ken Laloge CPA CA, a partner with Crowe Mackay LLP in Kelowna.
Comments were documented and shared with CPA Canada which is coordinating a national comment letter. In preparing its response, CPA Canada is assisted by a Taxation Advisory Committee comprised of members from across the country including two from BC: Ken Laloge and Dino Infanti CPA CA, a partner with KPMG in Vancouver.
The proposed changes are complex and interested readers should review the full policy paper and commentary available on the CPA Canada website. There are three major issues which are summarized below:
The policy paper proposes legislation to extend the “tax on split income” (TOSI) rules to dividend income earned by adult family members who are 18 to 24 years old subject to a new reasonableness test. This test considers the extent to which the family member contributed labour or capital. Income splitting using dividends that are not consistent with TOSI would be taxed at the highest marginal rate. The government requested feedback on draft legislation which, when enacted, is expected to generate $250 million in additional tax revenue annually.
Corporate income is taxed at a lower rate than personal income giving businesses more money to invest in order to grow their enterprise. When the income in a private corporation is eventually realized by the individual taxpayer, then the tax rates are close to being the same which is the concept of “integration”. However, holding passive investments inside a private corporation provides an opportunity for deferral of tax. The government is exploring various approaches that preserve the intent of lower tax rates on active business income earned by corporations while eliminating the tax assisted financial advantages of investing passively through a private corporation.
Converting Income into Capital Gains:
Current tax strategies use provisions in the Income Tax Act (ITA) to convert income that would otherwise be taxed as salary or dividends into capital gains. The policy paper proposes legislation to amend section 84.1 of the ITA to eliminate certain tax strategies. However, these proposes changes impact intergenerational tax planning which could result in double or even triple taxation. The government requested input on how to accommodate these intergenerational transfers.
During the consultation phase, the profession’s overriding considerations were to ensure the public interest is served by Canada’s tax system and that the process should consider the issue from a wide array of perspectives such as fairness, simplicity and efficiency. Further, to ensure measures are in place to encourage and support business creation and development for a stronger economy that benefits all Canadians.
Tax fairness and reform has been a key focus for the profession over the past many years. If you would like to receive the profession’s comment letter to the government, please contact David Chiang CPA CA, vice-president member services to request a copy (available in October).