On July 18, 2017, the federal Department of Finance (“Finance”) announced plans to eliminate a variety of tax planning opportunities involving the use of private corporations. The proposed changes are outlined in a 63-page document called “Tax Planning Using Private Corporations,” which is accompanied by draft legislation and explanatory notes.
The proposed changes are intended to target three widely-used tax planning strategies which, in Finance’s view, unfairly benefit wealthy Canadians. These strategies are broadly described as:
- Sprinkling income using private corporations;
- Holding a passive investment portfolio inside a private corporation; and
- Converting a private corporation’s regular income into capital gains.
Finance has proposed numerous measures to eliminate what it considers unfair use of these strategies. Some of the more notable proposals include:
- expanding the “tax on split income” rules to include people age 18 and older;
- introducing a “reasonableness test” for income sprinkling, based largely on labour/capital contributions;
- eliminating opportunities to multiply access to the lifetime capital gains exemption, including through the use of trusts;
- eliminating opportunities to “step-up” the cost base of shares; and
- introducing measures to prevent “surplus stripping.”
The proposed changes are not yet law. However, if implemented, they will have a profound effect on many taxpayers who have planned in accordance with the current rules.
In terms of their effective date, Finance has indicated that most of the proposals described above will take effect as of the 2018 calendar year. Notably, however, Finance has specifically stated that the proposals relating to cost base step-up and surplus stripping will take effect retroactively as of “Announcement Date.” Although the term “Announcement Date” is not defined in Finance’s materials, it is presumed to be July 18, 2017.
Final decisions on the proposed changes will be announced following a 75-day consultation period which ends October 2, 2017. Stay tuned for further updates.