Taking Aim at Taxing Private Corporations

If you thought that this was going to be a quiet summer, time to enjoy vacations and not worry about the business for at least a couple of weeks, think again. Our Liberal government has given us an unwelcome surprise as proposed tax changes which target private Canadian corporations and the so‑called ‘wealthy’ Canadians.  There were hints in the 2017 Federal Budget back in the spring that something was coming our way, so now we know.  It is a hard-hitting set of tax provision changes that are meant to target those who are apparently not paying their fair share of taxes.  These are the wealthy business owners who use their corporations to defer taxes or pay significantly less taxes than the ‘middle class’.  Unfortunately, it appears that these changes are so extreme that there will likely be some unfavourable outcomes that could damage small businesses and our economy. 

There are three main areas of attack which include the following:

  • Dividend ‘sprinkling’ by paying corporate dividends to lower income tax bracket family members
  • Holding investments in private corporations and paying lower taxes on investment income
  • Converting what would be dividends to capital gains which are taxed at half the tax rate of investment income

 

The Canadian tax system has been developed to allow for integration to exist, which is the concept that an owner of shares of a private corporation operating a business should not have a preference as to whether he/she was paid a salary as employment income from the business or received dividend income from the corporation, since the overall tax effect would be the same. However, the Liberals have identified ways in which they believe the integration system is being compromised in the areas as identified above.  Many of these changes are directed at private business owners and professionals such as doctors, dentists and others who have been allowed to incorporate their professional practices.  What they have failed to recognize is that these professionals are also small business owners who offer jobs, have overhead expenses and pay a lot of tax, not just corporate taxes – GST/HST, payroll taxes, employee health taxes etc.  There are some in the media that have already speculated as to the extreme high tax rates that may result from these changes – as high as 73%!  That will no doubt compromise a business owner’s ability to pay wages, or grow a business and may drive business away from Canada. 

Draft legislation has already been released for two of the three areas with comments accepted until early October. Chances are that with the legislation already there, it is not likely that many changes will be made.  The one area with no legislation drafted at this point is the area addressing investments held in private corporations in which the government is suggesting to do away with the whole refundable tax regime.  This would be an extreme change and will take more time to work through. 

In the meantime, much work will be done in the coming weeks by groups impacted by these rule changes. If you have a private corporation you should be thinking about how these changes are going to affect your financial position now and in the future. 


The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
 
 

Posted: Saturday, July 15th, 2017 | Categories: Commentary.

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