TAX PLANNING FROM THE KNOWLEDGE BUREAU
By Evelyn Jacks
Faced with widespread backlash from professionals, farmers, and small
business owners, Finance Minister Bill Morneau has backtracked on a few of
the Finance Department’s controversial tax reforms for private
corporations, tinkering with some of the proposed changes and adding a tax
cut of $2.9 billion over the next five years to douse the flames of
discontent. However, family businesses will continue to face tax risk and
uncertainty due to a “reasonableness” test – albeit a simplified one – that
will limit income sprinkling to contributors of labor, risk, or capital in
Acknowledging the fact that the Canadian economy is growing faster than it
has for a decade, with over 400,000 jobs created in the last two years, the
government continues with the narrative that the benefits of that economic
growth have not been evenly shared. (One could perhaps counter that neither
have the risks).
It again points out the real issue that started this initiative: Should
significant growth in private corporations continue, the personal tax base
will weaken, and that will have the effect of increasing taxes for
unincorporated taxpayers. It points out that 80% of passive investment
income is earned by private corporation shareholders who make more than
$250,000, perhaps providing a clue to some upper income taxation measures
The government also stands firm in its commitment to limit income splitting
to family members who are not active in the family business and to tax
dividends received by non-active family members to high marginal tax rates,
based on a reasonableness test that requires a demonstration by adult
family members of their contribution to the business based on any
combination of the following:
* Capital or equity
* Financial risk – such as co-signing a loan and/or
* Past contributions of labor, capital or risk
The burden of proof will rest with the family based on a “reasonable”
contribution to the business. This reads much the same as the mind-numbing
detail in the original proposals, although simplification of that burden is
On the good news side, the government will not move forward with proposed
changes to the Lifetime Capital Gains Exemption. That should ease concerns
about intergenerational transfers.
And then there is the sweetener: a proposed reduction in the Small Business
Tax Rate. This will bring the average federal-provincial-territorial rate
down to 12.9% on the first $500,000 of active business income earned by
small business corporations. The rate was supposed to be reduced to 9% from
11% in 2015, which was part of an election promise not to undo the former
government’s intent. However, the rate was frozen at 10.5% effective Jan.
1, 2016, when this government came to office. Now, the proposal is that
effective Jan. 1, 2018, the rate will go down to 10% for 12 months, and
then drop to the 9% rate on Jan. 1, 2019.
Draft legislation is expected in the next several weeks, with
implementation dates of Jan. 1, 2018.
Evelyn Jacks is the founder and President of Knowledge Bureau. This
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Her latest book,
Family Tax Essentials, is now available.
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©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
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It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.