Proposed Tax Changes relating to Tax Planning Strategies Used by Private Corporations

by in Canadian Government News and Updates
Proposed Tax Changes relating to Tax Planning Strategies Used by Private Corporations
Last July 18th, 2017, the Department of Finance released information regarding some proposed tax changes aimed at addressing tax planning strategies commonly used by private corporations. These strategies include income/dividend sprinkling, passive investment income and converting income to capital gains. 

The Department of Finance describes these three key tax planning strategies as follows:

-      Sprinkling income using private corporations – This strategy shifts income from an individual on a higher personal income tax rate to a family member on a lower personal income tax rate or who may not be taxable at all.

-      Holding a passive investment portfolio inside a private corporation – This strategy may lead to higher wealth accumulation than if the passive investment portfolio were held in a personal savings account.

-      Converting a private corporation’s regular income into capital gains –This strategy reduces income taxes by taking advantage of lower effective tax rates on capital gains.

To address these three tax planning strategies, the Government proposes the following:
-      Income Sprinkling:  The Government proposes to extend the existing tax on split income for minors to apply to adults in certain circumstances –
  • Dividends and other amounts received from a business, by an adult family member of the principal of the business, may be subject to a reasonableness test, which will be stricter for 18-24 year olds
  • Reasonableness will be based on the contributions made by the family member to the business
  • To the extent the amount is not reasonable, top-rate tax will apply.
  • Note: These measures are also proposed to address other income sprinkling issues such as the multiplication of claims to the Lifetime Capital Gains Exemption.

-      Passive Investment Income:  The Government proposes to eliminate the tax deferral advantage on passive income earned by private.

-      Converting Income into Capital Gains: The Government proposes to amend the income tax rules to address this tax planning strategy.

KD will be following the developments of these changes closely and will be advising our clients accordingly.  If you have any concerns, please feel free to contact us. 


Sources: http://www.fin.gc.ca/n17/data/tppc-pfsp-eng.pdfhttp://www.taxtips.ca/federalbudget/budget-2017.htm#proposed-tax-changes-private-corporations

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