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Update on the Canadian Tax Landscape

In this blog, we update you on the hotly contested July 2017 private company Canadian tax proposals.

First, there is cause for modest celebration by business owners: the initial adverse proposals intended to i) limit access to the capital gains exemption and ii) prevent converting income received from a private corporation into lower-taxed capital gains were cancelled by the government.  However, business owners should hold off on the champagne.

Finance confirmed it is moving ahead with measures, effective January 1, 2018, targeting sprinkling income of a private company across family members with lower or no income, who do not meaningfully contribute to the business, to create family tax savings.  Draft legislation was released in December 2017 and it is conceivable these measures will be legislated as part of the 2018 federal budget to be released on February 27, 2018.

Finance will release draft legislation for a proposed new passive investment income regime as part of the 2018 federal budget.  The government is concerned that owners of private companies have a considerable tax deferral advantage compared to employees and unincorporated, self-employed individuals who are fully taxed on income earned.  Rapid wealth accumulation is possible when a private company makes passive investments using surplus earnings instead of distributing earnings to individual shareholders to invest.  Lower corporate tax rates applicable to active business income compared to higher personal tax rates create this deferral opportunity.

The Canadian tax landscape for private companies has dramatically changed, and it certainly is more restrictive. It is prudent for business owners to revisit the suitability of existing tax planning. It is conceivable that other tax planning strategies may become more prevalent.

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