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Avail CPA | Tax News August 2017
The federal government has released its proposed changes to the Income Tax Legislation as it relates to tax planning for private corporations. A summary of the Department of Finance’s proposal is below.
To apply for taxation years after 2017 with a transitional period for 2018
1 – Extension of the Tax on Split Income (TOSI) rules – often referred to as Kiddie Tax rules. TOSI results in dividend income or shareholder benefits issued to a minor child to be taxed at the highest marginal rate.
2 – Constraining multiplication of Claims to Lifetime Capital Gains Exemption (LCGE) - The target of this change is for family trusts that have been used to multiply eligibility of LCGE used on as sale of business
3 – Improvement on the integrity of the tax system
Passive Investments inside a Private Corporation
Intended to apply on a go forward basis but will be drafted with the intention to limit impact on existing passive investments in a corporation
The government does not want private corporations to be used as personal savings vehicle, such as a TFSA or RRSP, as there is no limit to the tax deferral within a corporation whereas the TFSA and RRSP have regulated limits. In the past when refundable tax was brought into the tax regime there was a second component that was intended to compliment it: a tax on non-active assets to ensure private corporations were not used as a tax deferral vehicle. This second piece was removed from legislation due to complexity at the time, but the Department of Finance’s position is that these two components were designed to work together.
The proposed changes will not impose a tax when non-active assets are purchased and will instead amend the tax on investment income to be non-refundable and at a rate equal to the highest personal tax bracket. They also propose to change the legislation on dividends from that income with the intention for people to be in the same net worth position whether they earn the investment income personally or in a corporation. This new approach will require tracking on how passive income is derived to determine how it will be taxed at the individual level. Two methods for tracking this were considered:
1 – Apportionment Method
2 – Elective Method
The government also proposes that the non-taxable portion of the capital gain in the corporation will no longer be added to the capital dividend account (CDA).
Converting Income into Capital Gains
Effective for transactions on or after July 18, 2017
These changes are in response to cases lost when seeking to apply 84.1 or General Anti-Avoidance Rule (GAAR) when a transaction that would have otherwise been a dividend is converted to a capital gain. The government realizes that this current legislation causes restriction on legitimate intergenerational transfers of businesses. Current amendments proposed are as follows:
1 – Amendment to 84.1
2 – Implement an anti-surplus stripping rule to non-arm’s length transactions This rule will apply to transactions where an individual shareholder received non-share consideration such as cash from a private corporation, that amount would be treated as a taxable dividend. The intention will be to preserve the concept of integration so that income taxed in a corporation cannot be paid to shareholders as a capital gain.
To discuss how these proposed changes may affect your business, contact your Avail CPA accountant today.