In order to best understand where we are at with the 2018 Income Tax Proposals it is helpful to look back and see where we came from. In March 2017, the ramp up to Budget 2017 was riff with rumors that the capital gain inclusion rate was going to go up 50% effectively to 75% and the government was going to shut down the use of Family Trusts. As it turns out, none of this happened, rather there was only one tax item of any consequence that saw work in progress for professionals being taxed commencing 2018 over a 2 year phase in period (subsequently changed to 5 years). There was some commentary that a review would be done of the taxation of private corporations and for some this was taken as a positive sign that the government would not proceed using this as an excuse to sweep the exercise under the carpet similar to what they did with their proposals on election reform without any drastic changes to the tax system. Then on July 18, 2017 the tax community was shocked when in the dead of summer they introduced sweeping income tax changes the like of which have not been seen in 40 years. This was all to be finalized after only 75 days of “consultations”.
These proposed changes could be bundled in three categories:
- Capital Gain
- Income Splitting
- Passive Income
The changes amounted to major tax reform which normally would be the subject of a Royal Commission and indeed the magnitude of the changes have not been seen since 1972.
After the government received over 20,000 submissions and a daily beating by the press, even by those newspapers that normally support the Liberal government, during the week of October 16th daily announcements came out of the Department of Finance which revamped the original proposals or abandoned them.
The proposals with respect to capital gains, life time capital gain exemption, succession planning, double taxation of estates and inter-generational transfers were all dropped. With respect to passive income a “bone” was offered that it would not impact the first $50,000 of annual passive income and there would be more details and implementation of the passive investment proposals in Budget 2018. With regards to income sprinkling or as we call it, “income splitting”, the government continued to push ahead and suggest that there would be a “reasonableness test” that would target these recipients of dividends and other income at what effectively would be a 50% tax rate and without the benefit of tax credits and deductions.
The government is now pressed to write legislation and have it introduced before the end of the year on income splitting or a “tax on split income” (TOSI). Discussions with the Department of Finance suggests that the draft legislation should be coming before the end of the year, but then the Senate has become more independent and in order to become law the Senate would have to pass the legislation and have been pushing back. Officials from the Department of Finance suggested to us that the legislation will be much simpler than what is currently being proposed and will provide for exemptions. What this actually means we will have to wait and see. The existing proposals would result in many years of litigation in tax court to be able to interpret and apply the provisions. It is obvious that the government has “bitten off more than they can chew” and the passive income rules now to be introduced in Budget 2018 we don’t think will come to pass or will be changed significantly. The Department of Finance officials have suggested that they are not going to be applicable to holding companies and investment companies, and really only meant to be applicable to the after tax income of active business corporations. What is this supposed to mean?
At this point it appears that the tax on split income (TOSI) proposals will have some application. Accordingly, it may well be that 2017 is the last year that dividends could be paid to adult children and spouses without raising the angst of Canada Taxation. We are advised that where possible you use this window before 2018 to consider “topping-up” any income to family members accordingly.
Please do not hesitate to contact us to discuss how the new proposals can impact your corporation and family taxes.