On Thursday, October 19, 2017, the Department of Finance announced that it will not pursue its proposed measures targeting transactions which are intended to convert income into capital gains (the “Surplus Stripping Proposals”). The Surplus Stripping Proposals were announced in the July 18, 2017 consultation paper released by the Department of Finance (the “Consultation Paper”), which introduced sweeping changes to the taxation of private corporations and their shareholders in Canada.

The abandonment of the Surplus Stripping Proposals should address a number of the major concerns arising from the Consultation Paper, most notably those relating to:

  • the ability of a private corporation to pay non-taxable capital dividends to its shareholder;
  • double-tax for individuals who hold private company shares on death; and
  • additional tax on transfers of a family business to the next generation.

More clarification and details in respect of the other proposals referred to in the Consultation Paper are expected to be announced later this week.