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On February 27, 2018, the Federal Minister of tabled its 2018 budget. The most significant proposed amendment contained in the budget relates to the taxation of a Canadian Controlled Private Corporation’s (“CCPC”) investment income. These rules will be applicable to taxation years that start after 2018.
The main changes are as follows:
With the end of the year quickly approaching, below are a few tax tips that businesses and individuals should consider implementing before the end of 2017:
The role out of the government’s 2017 tax proposals on private corporations has been a significant mess to say the least. One of the measures that has been proposed relates to “income sprinkling” amongst family members and could adversely affect shareholders of private corporations starting January 1, 2018. The government has indicated they will issue revised proposals on these measures to simplify the rules later in the fall of 2017, however the actual date is not known at the time of writing this. If you wait too long there may not be any time to take any action before the end of the year.
If you have more than one shareholder in your private corporation I would strongly recommend that you seek income tax advice before the end of 2017 (as soon as possible) on how the proposals may affect the shareholders. Some items to take into consideration would be having a separate class of shares for each shareholder so that different amounts of dividends can be paid on each class of shares. You may also want to consider increasing dividends in 2017 to shareholders that could be adversely affected by rules for 2018 and later taxation years.
Below is a very simple example of how the proposed changes could affect shareholders:
Husband: $1,885
As outlined in the March 22, 2017 Federal Budget, the government proposed that professionals (accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor other professionals are excluded) would be required to include work in progress (work that has occurred to the end of the taxation year but has not been billed at the end of the taxation year) in income for income tax purposes. It was announced that this would be phased in over a two-year period. Previously a professional could elect to exclude work in progress from income, which allowed a professional to include work in progress in income in the year that the work was billed. The changes will be applicable to taxation years that begin after March 22, 2017. For professionals that have a taxation year end of December 31st, the new rules would be applicable to the 2018 and future taxation years.
On September 8, 2017, draft legislation was issued that propose to have the phase in period occur over a five-year period, instead of a two-year period as originally proposed. The changes will operate as follows for taxation years beginning after March 22, 2017:
This transitional rule is only available to a professional who elected to exclude work in progress in the last taxation year that began before March 22, 2017.
One of the matters that professionals will now need to deal with as a result of these proposed changes is how to determine the cost of work in progress and how to determine the fair market value of work in progress. As of the date of writing, I could not find any guidance from the Minister of Finance or the Canada Revenue Agency on this matter. Stay tuned for possible further details.
September 28, 2017
Mr. Tony Clement
17 James Street
Parry Sound, Ontario
P2A 1T4
Dear Mr. Tony CLement,
On July 18, 2017, the Department of Finance released a set of proposals – including draft legislation and explanatory notes - that significantly impacts private corporations and their shareholders especially for small and medium sized business owners despite the Liberal government’s constant message to the public that the tax changes will not affect these persons and are meant to tax the rich. I find this rather appauling and very misleading to the public.
I recently moved to the Parry Sound area and opened up an accounting office in Parry Sound. I have 20 years of tax experience and I can hardly understand the rules. What I do understand is this will add significantly complexity for small and medium sized businesses to comply with the proposed tax laws if and when they are enacted and will also result in an increased tax burden to most.
As you are aware, within the Parry Sound area businesses mainly consist of small and medium sized businesses with the odd large business here and there. Small and medium sized businesses will have to incur additional annual professional fees, in some cases significant to try to comply with the proposed tax laws, in my view there is no way in hell that the vast majority of these people will be able to understand how to apply the proposed changes without the help of a professional. If the rules are applied incorrectly, they would incur significant additional income taxes, interest and potential penalties over and above what they already pay.
On July 18, 2017, the federal Finance Minister issued a consultation paper, draft legislation and explanatory notes on proposed changes to the taxation of private corporations and their shareholders. Presumably, the proposals are meant to further the government's initiatives to tax the rich, provide tax fairness to all taxpayers and assist the middle class. The proposals in my view do not achieve these objectives, the proposals can apply to almost every private corporation and their shareholders and could most adversely affect the middle class. Some of the proposals are not set to take effect until 2018, and some proposals will take effect retroactively on July 18, 2017, if they are enacted. The government has asked the public for feedback up until October 2, 2017, which does not leave a lot of time to respond to the government.
If you or your family members own a private corporation I would highly recommend that you contact your tax advisor as soon as possible and well before the end of the calendar year 2017 to see if there are planning opportunities available that you can take advantage of before the end of the year and assess the impact that the changes will have on a go-forward basis.
Please contact us if you would like to discuss these matters, an initial consultation is always free, and we would be pleased to assist you with this process.
The proposed changes are highly complicated. We have therefore not explained the proposed changes in great detail but have highlighted some of the main issues in very general terms. The proposals are aimed at four specific issues:
In general income splitting is achieved when an individual in a higher income tax bracket reduces their income by having other individual(s) (usually family member(s)) in a lower income tax bracket, pay tax on a portion of the income. The result is that the overall income tax paid is reduced.
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