Following the legislative proposals announced by the Minister of Finance on July 18, 2017, several amendments were announced during the month of October following the public consultation period. This text summarizes these latest proposed changes:
- Small business tax rate: it is proposed to reduce the federal tax rate applicable to income eligible for the small business deduction. The tax rate will drop from 10.5% to 10% as of January1, 2018, then to 9% as of January1, 2019.
- Income-splitting measures: it is proposed to go ahead with measures aimed at restricting the possibility of income splitting between members of the same family (spouse, children, etc.). From now on, family members will have to demonstrate their contribution to the business according to four basic principles: contribution of labour, contribution of capital, responsibility for the financial risks of the business, and previous contributions in relation to these three elements. New legislative measures are expected to simplify these criteria. These measures will apply to the 2018 and subsequent taxation years. It would therefore be a good idea to maximize income splitting for 2017 with your family members.
- Measures to restrict access to the lifetime capital gains exemption (“LCGE”): it is proposed to abandon proposals to restrict access to the LCGE for shares held by a trust or during the period preceding a shareholder’s age of majority. While this change should alleviate some of the concerns about corporate transfers, there are still a number of uncertainties. Government authorities are expected to provide further clarification in the coming weeks.
- Measure concerning the conversion of income into capital gains: it is proposed to abandon the proposals concerning the conversion of income into capital gains. This is a positive change in favour of family business transfers. However, it is planned to continue the review in this area with a view to making changes over the next few years. Related proposals concerning the capital dividend account should also be dropped.
- Income from passive corporate investments: on October 18, 2017, the Minister of Finance announced his intention to limit the tax deferral arising from passive investments held in private companies. Details of the measures will be published in the next federal budget to be tabled in 2018. However, the following clarifications have been mentioned: investments already made will be protected; which implies that these measures will only apply to future investments. In addition, the measures will have to protect the capacity of companies in anticipation of emergencies that may arise (e.g. equipment replacement). Finally, an annual passive income threshold of $50,000 should be exempt from the new measures. It may therefore be advisable to maximize transfers of funds to management companies prior to the application of these new rules.
While the latest announcements have given us a better understanding of the Finance Minister’s direction, we should learn more in the coming months. In the meantime, don’t hesitate to make an appointment with one of our tax specialists to assess the tax implications of these proposals on your current business or structure, so that you can take the appropriate measures or make the necessary changes.
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