Tax Planning Using Private Corporations

Changes Targeting the Taxation of Passive Income in a Private Corporation

Reminder

On July 18, the Minister of Finance, Mr. Bill Morneau, announced a consultation on proposals to change the taxation of Canadian private corporations (hereinafter the “Consultation Period”). The proposed measures are complex and, if adopted, will affect tax planning for many clients. (See the summary of the measures here.)

Modifications after the Consultation Period

Since the launch of the Consultation Period, Canadians have provided significant feedback on the proposed changes to the taxation of Canadian private corporations. Accordingly, the Government announced their intention to provide new measures to “modify” the proposals initially made in their July 18 Consultation Paper. More particularly:

Reminder: on October 16, the Government announced its intention to simplify the proposals initially made to the tax measures limiting income splitting strategies. In addition, they announced that they will NOT be moving forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption (see the Communiqué here).
• Note: The Government will release, later this fall, the revised draft legislative proposals regarding income splitting, which will be effective for the 2018 and subsequent taxation years.

On October 18: the Government announced its intention to move forward with measures to limit the tax deferral opportunities related to passive investments within private corporations. More particularly, in further developing these measures, the Government will ensure that:
• the new measures will apply on a go-forward basis;
• the new measures will protect “past investments” (accumulated investments already made) and the future income earned from such “past investments”;
• the new measures will not apply to the first $50,000 of passive income earned per year. Hence, there will be no tax increase on investment income below this threshold.

• NOTE: The details of the proposed measures will be released in Budget 2018, including a technical description of how the passive investment income threshold will be applied.

How can I be ready for the changes regarding passive income?

1. See the Government’s announcement here.

2. Watch for: Budget 2018 will provide details of the proposed measures and the effective date.

3. Notify clients that no action needs to be taken at this time. Measures will apply only on a go-forward basis.