Monday, October 16, 2017

Government not proceeding with Restrictions on Capital Gains Exemption


On October 16, the federal government announced its first concrete modification to the sweeping income tax changes that it had proposed on July 18.

The media has focussed on the phased reduction to the low income tax rate that applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation.  The federal rate on such income will decline to 10% at the start of 2018 and to 9% at the start of 2019.  Tax rate cuts are always welcome, although they sometimes have the taint of bribing taxpayers with their own money.

The more significant change was the decision not to proceed with restrictions on capital gains exemption claims.  The capital gains exemption provides each Canadian resident with the opportunity to earn up to $1 million in tax-free capital gains on the sale of qualifying farm and fishing assets and just over $835,000 in tax-free capital gains on the shares of qualifying active business corporations.  On July 18, the government proposed numerous restrictions, including the following.
  • No capital gains exemption would be available for capital gains that accrue while eligible assets are held inside a trust.
  • No capital gain exemption would be claimable by an individual under the age of 18.
  • A capital gains exemption would be claimable only to the extent that an individual could be considered to have “earned” the exemption through actively working in the business in question.
The government now indicates that it will not be proceeding with these restrictions.  That is good news.

The government seems to be recognizing the difference between wages and investments.  Capital gains are, after all, an investment return.  If I purchase shares of Microsoft and the shares increase in value, I have made a good investment.  It does not matter that I have not personally contributed anything to that increase in value.  I may be completely computer-illiterate – it does not matter.  I benefit from that increase in value because I was astute enough to invest in a good business.
It is to be hoped that this recognition of the difference between wages and investments will continue to guide the government’s modifications to its July 18 income tax proposals.  We will have to wait and watch.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Sunday, July 23, 2017




The Old are Young Again
It’s not exactly the fountain of youth, but many Canadians might soon be treated for tax purposes as if they were once again under 18 years of age.  Enabling legislation has to be passed into law, but this might come into effect as soon as 2018.
Currently, Canadian income tax law applies a special tax – colloquially referred to as the “kiddie tax” -- if a minor child receives dividends or other income that has been generated by activities of a parent.  For example, this special tax might apply if a parent carries on business through a private corporation and the child receives dividends from the corporation.  If the special tax applies, the dividend is taxed at the top marginal tax rate applicable to that form of dividend – as if the child were a top-rate taxpayer.  This removes any income-splitting benefit.
Under current law, the kiddie tax ceases to apply in the year that the child reaches age 18.  This means that income splitting can start in the year that a child has his or her 18th birthday.  As well, income can be split with one’s spouse and with other adults.
Starting in 2018, the government intends to significantly extend the “kiddie tax” rules.  The special tax will apply to all individuals – including spouses and adult children – who are related to the principal of the business.  For these extended rules, relatives will also include uncles, aunts, nieces and nephews (who are not normally related for income tax purposes).
The rules will apply to income that is received directly on shares owned by the related individual or indirectly on shares held through a family trust.
A limited exception will apply to the extent that income paid to the related individual is reasonable in light of services that the individual actually provides to the business.  In general, the related individual will be able to receive salary or dividends provided that the aggregate amount of the salary and dividends does not exceed what would have been paid to an unrelated individual performing the same services.  A more restricted exception applies if the individual is between the ages of 18 and 24.
The new rules will not totally prevent income-splitting with other family members.  However, income splitting after the end of 2017 will require that the family member actually work for the business and will be limited to a level that is reasonable in light of those services.
The proposed rules will not affect other forms of income-splitting techniques, such as loans made to a spouse at the prescribed rate of interest.
The new proposals are included in draft legislation that was released on July 18, 2017.  This draft legislation includes significant other changes that will be described in future blogs.
The federal government has invited comments on the draft legislation.  Comments can be made prior to October 2, 2017 by sending the comments to fin.consultation.fin@canada.ca.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Wednesday, July 19, 2017


Major Tax Changes to Private Corporation Taxation


On July 18, the federal Finance Minister released his promised consultation paper on the taxation of private corporations.  The paper includes draft legislation, most of which will be effective at the start of 2018 but some of which is effective as of announcement date -- July 18, 2017.

The immediate measures seem to prevent the use of pipeline planning to prevent double taxation of the value inherent in private corporation shares held on death.  Double taxation of this value can arise if the estate withdraws funds from the corporation to pay the capital gains tax triggered by the death of the shareholder.  While it will still be possible to avoid double taxation, the new rules seem to require use of the technique of triggering a capital loss by redeeming the shares held by the deceased in order to trigger a capital loss that can be applied to offset the capital gain triggered by the death.  While this avoids the double taxation, it results in taxation of the date-of-death value as a deemed dividend (at a higher tax rate) rather than as a capital gain.  The carry-back technique is also subject to strict time limits (so that the ability to avoid the double taxation can be lost if one does not act promptly).

It will take some time to work through the implications of the various immediate and proposed changes.  These provisions fundamentally alter long-standing estate planning techniques.

The release is characterized as a consultation paper, but is a consultation paper that includes changes that are effective immediately (assuming that the enabling legislation is passed into law by the current federal parliament).  One can expect that the government will receive lots of comments on the package before the comment deadline expires on October 2, 2017.  Comments can be sent to fin.consultation.fin@canada.ca.

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.