Last Tuesday July 18, the Federal government announced proposed tax legislation aimed at curtailing certain tax planning strategies using private corporations which -in the government’s opinion- undermine the equality and fairness of our tax system. The announcement focused on these areas:
- Sprinkling income using private corporations: draft measures include the extension of kiddie tax rules to adult family members, elimination of the Lifetime Capital Gains Exemption (LCGE) to minor kids, elimination of the LCGE to gains accrued by trusts, etc.
- Holding a passive investment portfolio inside a private corporation: draft legislation includes alternative methods to discourage businesses from accumulating excess funds taxed in the corporations at lower tax rates.
- Converting a private corporation’s regular income into capital gains: the proposed measures include the extension of the anti-avoidance provisions currently targeting income stripping transactions that take advantage of capital gains treatment (whether or not LCGE claimed).
Earlier this year, the 2017 Federal Budget documents mentioned the government was looking into studying certain measures to limit abuses to the tax system by private corporations. However, the timing and extent of the announcements far exceeded our understanding of the government’s intentions.
These measures are currently in draft mode and subject to consultation until October this year. If implemented without changes, they could become effective either as of the announcement date or 2018. However, there does not seem to be any grandfathering for corporate structures in place prior to the announcement date. The new measures though seem to include a transition period.
In the weeks ahead, we will be analyzing these legislative changes in further detail and determine the best course of action in your particular case -if any- which might need to be implemented immediately.
We will keep you informed of any progress on this matter. In the meantime, please feel free to contact one of us (Ariel Epstein or Scott Johannson) at the contact information provided below if you have any questions.
Ariel Epstein, CPA, CGA
Senior Tax Manager
Scott Johannson, CPA, CA
Senior Manager of Financial Services
Direct: (204) 985-4008