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Proposed Tax Planning Changes for Private Corporations

On July 18th, the Federal Government’s Department of Finance announced significant proposed changes to certain mainstream tax planning. Details have been released in a comprehensive, technical consultation paper focusing on tax practices commonly used involving private corporations.

A brief summary of the proposed changes:

  • Income splitting (dividends and salaries) with adult related individuals (i.e. spouses and adult children) will now no longer generally be possible unless the individual contributes to the business (there will be a test).  The test of contribution to the business will be more stringent for individuals aged 18 to 24.
  • Multiplying the Capital Gains Exemption will be severely curtailed.
  • Increased reporting requirements for trusts.
  • Increased taxation on passive income earned in corporations that will not grow the business.  The government has not settled on how exactly they will tax passive income, but they are strongly considering replacing refundable taxes on investment income with an equal non-refundable tax, as well as proposing that the non-taxable portion of any capital gains be excluded from being added to the capital dividend account. These two changes would significantly increase taxes on passive income in a corporation.

Most of the proposed changes apply to 2018 and beyond.  The new rules are subject to a consultation period from now until October 2, 2017.

What does this mean to you?

If you own a private corporation or have a family trust this could have significant income tax implications to you on a going forward basis.

Please know that we are monitoring this situation carefully and will be providing updates as available. Until the consultation period has lapsed, everyone is in limbo, but this is a warning sign that adverse change is on the horizon.


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