The July 2017 Tax Proposals
The Canadian Department of Finance has proposed ground-breaking amendments to the Income Tax Act that would have a substantial impact on private companies and their shareholders, if these amendments are enacted into law. To further the Department’s agenda to close so-called “loopholes”, the July 2017 proposals reverse the effect of tax planning that has been sanctioned by the Supreme Court of Canada for decades, and previously accepted by the Canada Revenue Agency (CRA). According to the Department of Finance overview, the perceived mischiefs include income splitting among family members, using corporations to gain an unfair advantage on investment income, and converting income into lower-taxed capital gains.
Most significantly for many tax planners, the July 2017 proposals would severely limit multiplying the capital gains exemption among beneficiaries of a family trust. The capital gains exemption may be available on the sale of shares of private corporations, as discussed in a previous article, with a lifetime limit of $835,714 per person in 2017. Common tax planning involves the use of trust to multiply the capital gains exemption among family members. Although this type of planning is legitimate and quite well-known to the CRA, the current federal government seems to find it repugnant, and proposes to shut it down.
The attack on small businesses and their shareholders is not particularly surprising, and was alluded to in the 2017 federal budget. The July 2017 proposals will engender much discussion, speculation, conjecture, and outright misinformation. Many observers will be offended by the political stance that is apparently unfriendly to businesses and entrepreneurship. Some tax advisors might proclaim an end to tax planning, or that family trusts no longer have any use. Though the proposed amendments are substantial, the latter two statements are likely to prove to be inaccurate, or at least overstated reactions. The Department of Finance has invited consultations on the July 2017 proposals. Interested organizations will undoubtedly make submissions that are critical of the proposals, and time will tell whether the Department of Finance will take the criticisms to heart.
Accountants and tax lawyers may recommend that their clients who own private corporations crystallize their capital gains exemptions before the July 2017 proposals become law. (“Crystallizing” a capital gains exemption refers to a corporate reorganization where a capital gains exemption can be utilized without selling shares, which decreases the tax on a future capital gain.) Such a strategy may be prudent. Innovative firms such as ours may propose tax strategies that do not rely on traditional planning such as income splitting and multiplying the capital gains exemption.
Whatever one’s outlook on the July 2017 proposals, it would be prudent for business owners to take a measured approach, and their advisors should resist the urge to jump to conclusions. Instead, what is required is a thorough and thoughtful analysis of the July 2017 proposals, together with a careful consideration of each individual client’s circumstances and tax risk profile, to get the best tax result for a private company and its shareholders.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact Robert Worthington or any one of the lawyers in the Tax Law group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.