Tax changes could affect your business

January 25, 2018 – Government Relations

On July 18, 2017, federal finance minister Bill Morneau released a consultation paper, Tax Planning Using Private Corporations and announced proposed changes to three areas of tax planning used by private corporations:

  • income sprinkling;
  • holding passive investments in a private corporation; and
  • converting income into capital gains.

This was part of a review of tax measures including loopholes and tax planning strategies that he claimed give unfair advantages to corporations, their shareholders and wealthy family members.

On October 3, 2017, after extensive input from small businesses, trade and professional associations and individuals, Morneau announced his government would not proceed with changes regarding converting income into capital gains.

The government would still move forward with changes to income sprinkling and holding passive investments in a private corporation.

Income sprinkling restrictions

On December 13, Minister Morneau announced he would simplify measures to restrict income sprinkling through changes to the Income Tax Act for the 2018 tax year.

Exemptions include:

  • business owners aged 65 or older. Sprinkling with a spouse will be permitted in the same way pension income can be split between spouses;
  • adults aged 18+ if they work at least 20 hours per week in the year or during the previous five years; and
  • adults aged 25+ if they own at least 10 per cent of the shares of a small business.

Anyone not qualifying under these categories, can choose to pass a “reasonableness test” based on labor and capital contributions and risk assumed.

Personal real estate corporations and owners of private corporations have until the end of 2018 to adjust to the proposed exclusion for significant shareholdings‎. The CRA has prepared guidance on how to do this.

Holding passive investments in a private corporation

Corporate income is based on lower rates than personal income, giving businesses more money to invest to grow their business – including holding passive investments inside the corporations.