Private Corporation Tax Proposals: Federal Government Changes Tax Rate and Tweaks Income Sprinkling

October 17, 2017 Eileen Maltinsky

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On October 16, the federal government announced changes to the small business tax rate and made some announcements related to the proposed rules around private corporations.

With the aim of creating more jobs and growing the economy, the small business tax rate is proposed to decrease as follows:

Today

10.5%

January 1, 2018

10.0%

January 1, 2019

9.0%

Proposed tax changes: What’s changing and what’s not

The government had targeted three areas in its policy paper. Here’s what they’ve announced so far.

1. Sprinkling income using private corporations

The government announced it would simplify the proposals to allow family members to act on the rules around income splitting with more certainty. However, it plans to forge ahead and eliminate the ability of a private corporation to pay family members dividends if the family members have not made a reasonable contribution to the business.

The government also announced that they will not be proceeding with proposed tax changes that would limit the ability of multiple family members to access the lifetime capital gains exemption (LCGE). This was in response to concerns from the public with respect to intergenerational transfers.  

2. Holding a passive investment portfolio in a private corporation

The government did not mention this issue in its announcement, but indicated additional proposals would be announced in the coming weeks to address unintended consequences.

3. Converting a private corporation’s regular income into capital gains

This proposed tax change was not addressed in the October 16 announcement but we expect more in the coming weeks.

What does this mean to incorporated physicians and other professionals?

  • If you are considering income splitting for 2017, speak with your MD Advisor now, as income splitting changes are expected to take effect on January 1, 2018.
     
  • While the announcements around the LCGE and simplification to the income splitting rules are a good step, we are awaiting final legislation to determine the impact on our clients. We expect it is unlikely that a medical professional corporation will be able to benefit from these changes.
     
  • Though the consultation period is closed, Finance Minister Morneau indicated that he is interested in hearing any additional comments.

With more announcements expected over the coming weeks, MD is closely monitoring the situation. We encourage you to remain in touch with your MD Advisor and tax advisor who can help you understand the potential consequences of these changes on your financial plan.

 

About the Author

Eileen Maltinsky

Eileen Maltinsky CPA, CA, CFP is Vice President with the Taxation Services Team at MD Financial Management. She leads the team of tax professionals responsible for providing tax solutions, tax planning and tax compliance for the MD group of companies.

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