Revised Private Corporation Tax Proposals: What's Important & What to Do
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Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice

“In October, during the Small Business Week, we had a number of announcements and changes that were made to the original proposal, so to break it down, there were three main things that the government was concerned about.”

“Number one was income sprinkling, where a business owner sprinkled dividends to family members that weren't necessarily involved or in most cases not involved with the business at all. Number two was a retention of passive investment income inside that corporation, which enjoyed a generous tax deferral. And number three was the conversion of income into capital gains type, which is taxed at a lower rate. So the government has backed off a little bit.”

“So what happened in October is that government has backed off on limits to multiplying the lifetime capital gains exemption. So as we all know, when you sell a business the first $835,000 of capital gains are tax free under the Lifetime Capital Gains Exemption, a million dollars for farm and fishing property.”

“The government had originally proposed some rules with an election, very complicated stuff to basically stop people from multiplying that exemption either directly or indirectly use of a trust. Those rules have all been scrapped because of the impact it would have had on the transferring of businesses to the next generation.”

“The other change that we saw in October was to put a $50,000 limit on passive income, and the concern of the government on retention of passive income in the corporation was that because of the system and integration, when your earn income inside of a corporation, you pay a small rate of tax, a small business rate, which leaves a larger pool of capital that you have inside the company than an employee otherwise would be able to accumulate personally. The government listened to many of the submissions made on this issue, and have announced a $50,000 passive income limitation annually, which means that going forward a business owner, once these new rules come into play, would be able to accumulate what they say is about a million dollars of capital using a 5% nominal return or $50,000 inside that business, without paying a very punitive tax rates, approaching 73% in some provinces. Now there are still some concerns we have with the $50,000.”

“How is it measured? Do you have to track it? How do you track it? And this will be coming in the February or March 2018 federal budget. I think we'll still see some changes on this. The rules are extremely complex. The good news is that from a grandfathering perspective, all existing retained earnings are grandfathered. There is nothing that needs to be done now or before this announcement comes into play because all existing money, and any income on the money that's already in the company will be forever grandfathered and not subject to the $50,000. It's only new income earned after some future date when it's over $50,000 that will be subject to these new rates.”

“And finally in terms of what you really need to do in 2017 is address the income sprinkling because there are plans starting Jan 1st 2018 to tax any dividend paid to non-involved family members from your corporation at the highest marginal rate on dividend income. So this would be your final year to do dividend sprinkling if you've got a spouse or you've got kids in the corporation that are not involved. You may consider paying substantial dividends before the end of 2017, if they're in lower tax brackets, to maximize the benefits of the lower tax rates of the family members.”

“For all the latest information, and examples of what you need to do before the end of the year, please see our updated report called Taking Action: Revised CCPC tax proposals, what you need to know (and do) now.”

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