In it’s efforts to rein in what it considers tax loop holes, the Canadian Government has recently floated a tax package that takes aim at private corporations.
The Federal Government intends to make 3 significant tax changes affecting private corporations.
There are three main areas of interest that are being addressed:
- Income sprinkling.
- Converting income into capital gains.
- Holding passive investments inside a private corporation.
The first tax aspect to be affected is 'Income Sprinkling’ – which is considered income sharing by those who use it.
This allows the splitting of revenue earned to be allocated to a number of different individuals to effectively reduce the total tax payable on the income received.
While eliminating income sprinkling may generate some additional taxes for the Government, the proposed changes will not likely change the taxes on the wealthiest Canadians who use this strategy. Families currently benefitting from income sprinkling will merely use other legal options such as Trusts, Gifting and Corporate Loans to structure around the new legislation if it comes into practice.
Additionally, continuation of family members on private company payrolls and personal expenses passing through private corporations will likely endure post the legislative changes as these expense write-offs are difficult for CCRA to track and are expensive to audit.
The second tax proposal – the conversion of income into capital gains – is a complex taxation issue that is best left to a tax professional such an accountant and/or lawyer. Like Income Sprinkling, options such as Capital Gains exemptions, corporate or inter corporate loans, Trusts, International Business Corporations, multiple corporate structures and possibly residency changes will likely dull the impact of the proposed changes for many Canadians targeted by the proposed legislation.
The most contentious proposed tax act change from a wealth building perspective will undoubtably be the targeting of capital held inside a private corporation. However, based on what we currently know, there are a number of obvious and cost-effective workarounds. First, the definition of passive versus active business income is crucial.
Should the active business income test conditions be met the proposed tax act legislation will be largely irrelevant. For private corporations with “CCRA deemed” passive investments, there are a number of alternative structures that may be helpful. These would include Trusts, Individual Pension Plans, corporately owned life insurance policies, among other strategies. Again, in these cases when an active tax strategy is required, the help of a tax professional or lawyer is recommended.
The new tax legislation is currently expected to be announced during the 2018 budget. Should the proposed changes alter your forward looking taxation position we would encourage you to consult your accountant and lawyer. We are also available to discuss best practices we see being implemented across our franchise.