On July 18, 2017, the federal government announced wide-ranging income tax proposals affecting private corporations. In the Economic Statement of October 24, 2017, they backed down from the original proposals, though some will remain. Here’s a quick overview of the current status of the July 18, 2017 proposals:
- Small business deduction: The federal tax rate on Canadian-controlled private corporations (on active business income) for the first $500,000 of income per year, currently 10.5%, will drop to 10% January 2018 and to 9% starting January 2019. However, the related “gross-up” and dividend tax credit on dividends paid by private corporations to individual shareholders will also be reduced, so that once dividends are paid out, the effective total tax on the corporation and the shareholders will be the same as before.
- Income sprinkling: The proposals to prevent income splitting by imposing a high tax rate on dividends or salary paid to family members will proceed, but not in the form proposed on July 18. Adult family members who have contributed to the business will not be subject to the new rules. We won’t have specifics until the draft legislation is released, likely in mid-December. However, the new rules might still take effect starting January 1, 2018.
- Lifetime capital gains exemption: The proposals to limit the exemption in various ways have been dropped.
- Converting income to capital gains (dividend stripping): These very technical proposals to amend section 84.1 and add new section 246.1 to the Income Tax Act have been dropped.
- Passive income: The proposal to tax a private corporation’s passive income (investment income) at high rates, with insufficient offsetting dividend tax credit, will proceed, but will not apply to the first $50,000 of a corporation’s passive income each year. The effect will be to subject any additional passive income at rates well over 70% in many cases, once dividends are paid out to shareholders. However special exceptions will be made for venture capital and “angel” investors who fund growing businesses. Again, we won’t have specifics until the legislation is released, likely in mid-December.
It remains to be seen, when the revised legislation is released in December, what the details of the changes are and how they impact businesses. The government said the legislation will be released “later this fall”, so we will likely see it on December 20 (the last day of fall).