Major Business Tax Changes Being Considered by Federal Government
The Department of Finance Canada is considering major changes to how corporations will be taxed. The proposed rules could have a significant impact on many Canadian businesses - small and large.

The Surrey Board of Trade and its Finance & Taxation Team are currently studying how the proposed changes will affect our members in different industries, with family businesses, and those with different ownership structures. We will be submitting recommendations to Finance Canada and speaking to the Federal Government.

On July 18, Finance Canada launched a consultation on how "tax-planning strategies involving corporations are being used to gain unfair tax advantages." The document: Tax Planning Using Private Corporations, contains proposed policies to close these "loopholes." Please review the report posted on SBOT's Finance & Taxation page, and fill out the survey below.

The survey should take no more than 10 minutes. However, if you have more to say than available space, please share your thoughts by email to our Policy & Research Manager, Anne Peterson. Deadline: August 18, 2017.

Thank you for sharing your time and experience as we work on behalf of our members.
A QUICK SUMMARY

The proposed changes are from Canada's Budget 2017 commitment to address tax planning strategies, specifically where high-income individuals gain tax advantages that are not available to others (p.5). Finance identified three issues:  Income Sprinkling, Portfolio Investment within a Corporation, and Conversion of Income to Capital Gains. We have, by necessity, provided only a very brief summary of each section prior to asking your opinion on the suggested changes. If our description is insufficient, we highly recommend you consult the REPORT. We have provided page references to assist you.

A.   INCOME SPRINKLING

Income Sprinkling is a term used to describe the strategy of reducing the corporation's owner(s)' income by giving a portion of the net to family members who, because of their lower overall income, would pay far less in income tax on the amount received than if the owner kept it all as his/her income. Section B (p.18-31) in the REPORT describes this fully.

* 1. Proposed Measures for Income Sprinkling
The proposed measures intend to address an imbalance between what recipients "invest" into the corporation and what they receive in return. Do you agree or disagree with each of the suggestions?

  Strongly Agree Agree Neutral /  Unsure Disagree Strongly Disagree
Extend the Tax on Split Income (TOSI) rules to be more restrictive for 18-24 year old family members (p.23)
Define "minor" (under 18) as a Canadian resident throughout a year with a Parent resident in Canada at some point (p.25)
Apply a more rigorous reasonableness test on return of investment (p.25)
Apply TOSI to "compound incomes" (p.26), incomes derived from investment of split income and other amounts of individuals under age 25
Limit the Corporation's ability to multiply the Lifetime Capital Gains Exemption (LCGE) across multiple family members (p.28)
Introduce a tax reporting requirement with respect to a trust's tax account number similar to requirements for corporations & partnerships (p.30)
Introduce measures for T5 slip requirements to treat partnerships and trusts the same for corporations in regards to interest amounts (p.30)

* 2. Would any of these proposed measures for addressing Income Sprinkling impact you? If so, how?

B.   PASSIVE INVESTMENTS IN CANADIAN CONTROLLED PRIVATE CORPORATIONS (CCPC)

A passive investment in a CCPC is taxed at a corporate rate, which is much lower than income tax rates. The purpose of this is to encourage re-investment into a business for future expansion. However, Finance has determined that some owners are using this opportunity as income. Finance is attempting to eliminate the financial advantages by developing an alternative approach to taxation that differentiates passive income from true corporate investments. Section C (p.32-54) in the REPORT describes this fully.

Roughly, there are two alternatives proposed:  Apportionment Method and Elective Method. The Apportionment Method tracks income taxed at the small business corporate rate, at the general corporate rate, and amounts contributed by shareholders. In summary, annual passive investment income would be apportioned based on the cumulative share of these separate pools, which could be distributed to shareholders as non-eligible, eligible, or tax-free dividends, respectively. (p.47)

Under the Elective Method, passive income earned in a CCPC is subject to non-refundable taxes (usually equivalent to top personal income tax rate) and dividends distributed would be treated as non-eligible dividends by default. Corporations could elect to treat dividends from passive income as eligible and forego the small business deduction. (p.49)

The questions that Finance asked for this section are below, however, we've slightly modified them to include our own. If there is insufficient space for your response, please send to Anne.

* 3. In your view, what approach would be preferable in order to improve the fairness of the system with respect to passive income?

* 4. If you prefer either the Apportionment or Elective Methods, what criteria or broad considerations should the Government consider in selecting a method?

* 5. Are there considerations that you would like the Government to know regarding tax treatment of CCPCs mostly engaged in passive investments?

* 6. What would be the appropriate scope of a new tax regime regarding capital gains? What would be the criteria?

* 7. Are there key transition issues that the Government needs to consider?

* 8. Is there any reason why any aspects of the new rules should not apply to private corporations other than CCPCs?

* 9. Are there any gender and/or equity considerations that the Government needs to be aware of?

* 10. Do you have any additional comments on this section? How will this impact you?

C. CONVERTING INCOME INTO CAPITAL GAINS

Individual shareholders with higher incomes can obtain a significant tax benefit if they convert corporate surplus that should be taxable as dividends, or salary, into lower-taxed capital gains -- otherwise known as "surplus stripping."  Section D (p.55-60) in the REPORT describes this fully.

Finance proposes to prevent taxpayers from using non-arm's-length transactions that "step-up" the cost base of shares of a corporation and avoid the application of section 84.1 of the act (p.57). Specifically, they will reduce the cost base of the taxpayer's share by the total of all capital gains realized on previous dispositions of the share by the taxpayer and any non-arm's-length individual. The reduction will apply regardless of whether a capital gains exemption was claimed -- it is ultimately intended to discourage taxpayers from trying to avoid section 84.1.

Finance also wants to address the concern that shareholders of corporations are ineligible for the Lifetime Capital Gains Exemption (LCGE) when they sell their shares to a corporation owned by their adult children because of section 84.1. (p.58). In other words, genuine inter-generational business transfers. If there is insufficient space for your response, please send to Anne.

* 11. What is your opinion regarding amending section 84.1?

* 12. Will this impact you? If so, how?

* 13. What would you advise Finance to do regarding genuine inter-generational transfers of shares?

Tell us a little bit about you

* 14. Do you own a Canadian Controlled Private Corporation (CCPC)?

* 15. How many individuals (including FT, PT, casual, temporary/term, and regular contractors) are employed by your company?

* 16. Which category would best describe your company? (NAICS based choices)

* 17. Do you have any further comments or suggestions that you would like to share with us?

Thank you!

Your input on this survey will help us advocate for our members who wish to ensure that their concerns are heard. If you have any questions or further comments, please email Anne Peterson, Policy & Research Manager.

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