Finance Canada – Tax Planning Using Private Corporations

In Budget 2017, the Minister of Finance, Mr. Bill Morneau, announced the Government of Canada’s intention to address tax planning strategies involving the use of private corporations.

With the July 18, 2017 release of the Department of Finance Canada consultation paper entitled “Tax Planning Using Private Corporations” (hereinafter the “Consultation Paper”), the Government is asking Canadians what actions should be taken to ensure that high-income individuals are prevented from using strategies involving private corporations to gain unfair tax advantages. The Government is consulting Canadians on three tax practices that are being used to gain unfair tax advantages:

1. Sprinkling income using private corporations
Shifts income from an individual facing a higher personal income tax rate to a family member who is subject to lower personal tax rates or who may not be taxable at all. Detailed legislative proposals have been released. If they are adopted, the proposed measures would apply to dispositions after 2017. However, special transitional rules are proposed.

2. Holding a passive investment portfolio inside a private corporation
May lead to higher wealth accumulation than if the passive investment portfolio were held in a personal savings account. There are no legislative proposals released in conjunction with the Consultation Paper. However, the Consultation Paper describes possible general approaches to eliminate passive investment incentives for private corporations.

3. Converting a private corporation’s regular income into capital gains
Reduces income taxes by taking advantage of lower effective tax rates on capital gains. Detailed legislative proposals have been released. If they are adopted, they will be effective as of July 18, 2017.

Canadians’ views will be taken into full consideration as the Government moves forward to address the issues related to tax planning using private corporations.

The deadline for submissions is October 2, 2017.