October 20, 2017 Tax Recap: What We Know
By Émilie Tremblay, lawyer, M.Fisc., TEP, Manager, Tax & Advisory Services
Updated October 23, 2017
There have been massive efforts on the part of accounting firms and practitioners like us, and small business owners across Canada, to warn the government of the unintended consequences and misunderstandings that were embedded in the proposed tax changes announced in July.
Thanks to our persistence, we have seen positive amendments to the proposed tax reform that we thought pertinent to share with our clients and partners.
What We Know
Throughout the week of October 16th, the federal government made a series of announcements regarding the proposed changes, including:
- Lifetime Capital Gains Exemption:
- The government will not be moving forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption.
- The Small Business Tax Rate:
- Will be reduced from 10.5 per cent to 9 per cent, and phased in:
- Effective January 1, 2018, the rate will drop to 10 per cent; and
- Effective January 1, 2019, the rate will drop to 9 per cent.
- Income Sprinkling:
- The Government will simplify the measures regarding the establishment of the contributions of spouse and family members to a family business.
- The Government will make some changes in order to better target the proposed rules and address double taxation concerns.
- A modified version of the draft legislation will be released this fall.
- Passive Investments:
- The federal government will move forward with measures to limit tax deferral opportunities related to passive investments in a private corporation, and will release draft legislation as part of Budget 2018.
- A threshold will be introduced for passive investment income of $50,000 a year for future, go-forward investments (equivalent to $1 million in savings when earning a 5 per cent rate of return). There will be no tax increase on investments below this threshold.
- The measures will only apply on a go-forward basis, and will only have implications when money is paid out to the shareholders (investments already made by private corporations’ owners, including the future income earned from such investments, are protected).
- The proposed changes to passive investments will not apply to income from AgriInvest (a self-managed producer-government savings account for producers to set money aside which can be used to recover from small income shortfalls or to make investments to reduce on-farm risks).
- Incentives will be maintained for venture capital and angel investors to encourage continued investment;
- The government will consider if it is appropriate to exclude capital gains realized on the sale of shares of a corporation engaged in an active business.
- No draft of legislation is released yet.
- Conversion of Income Into Capital:
- The government will not be moving forward with measures relating to the conversion of income into capital gains.
- This is great news, since the proposals would have significantly increased the cost of intergenerational transfers of family businesses, and cause uncertainty with post-mortem planning.
- The government also announced that they will propose changes to better accommodate the transfers of businesses to the next generation.
What’s to Come
Even with these announcements, uncertainty remains as we await for more announced changes to come, including a modified version of the draft legislation, which will be released later this fall. While a lot of information has been presented, note that all the announcements made this week are still proposed changes, and are not yet law.
In addition, we are waiting on the report from the Senate Committee on National Finance, which has until November 30 to complete its study of the proposed tax changes.
Finance Minister Bill Morneau announced that the Fall Economic Statement will be tabled on October 24, 2017. We hope to have more clarification at that time.
As always, we will continue to keep our clients up to date as we learn more about the proposed changes. We have compiled a list of clients who will be affected, and once the final announcements are made we will contact you directly to inform you of what steps should be taken to address your unique circumstances. In the meantime, if you have any questions or concerns, contact GGFL with any inquiries you may have.