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October 17, 2017

This morning, Finance Minister Morneau announced changes to his July 18th tax proposals.

 

The first question must be how, in only 2 weeks since the closing of the “consultation period”, the officials of the Department of Finance managed to review and consider over 21,000 writing submissions from taxpayers and tax professionals. Some of the submissions were in excess of 100 pages. Jamie Golombek, Managing Director of Tax & Estate Planning for CIBC calculated, in an article in the Financial Post on October 12th, that if the Department spent just 10 minutes per submission, it would take 465 work days to review all of the submissions.

 

What was announced today?

 

1. Reduction of corporate tax rate for small business corporations

 

Stephen Harper’s government had already announced a reduction in the rate of corporate tax paid by a Canadian controlled private corporation (CCPC) on its first $500,000 of active business income. One of the Liberal’s first moves was to cancel this tax reduction.

 

Today’s announcement is simply a reinstatement of the tax cut. It will reduce the tax that a CCPC will pay on its first $500,000 of active business income, gradually, starting in January 2018. The rate will reduce from 11% to 10% in January, 2018, and to 9% in January 2019.

 

A cynic might observe that the 9% rate will kick in before the next federal election.

This reduction, when fully implemented would amount to a tax saving of $7,500 for a CCPC earning the full $500,000. Most CCPCs do not earn close to that amount.

 

2. Income Sprinkling

 

There has been no significant change to these provisions.

 

The Finance Minister says that they will simplify the administrative burden on the family to prove that a family member has made a “reasonable contribution”. But, if the taxpayer can’t satisfy that burden, they will still tax their dividends at the top personal tax rate.

The only small beneficial change is that they have now referred to contributions as including, “past contributions”.

     

This will do nothing to reduce the massive amount of tax objections and appeals that we will see.

 

It will take 10 years before the Supreme Court of Canada to determine what is a “reasonable contribution.

 

3. Lifetime Capital Gains Exemption

 

They announced that they will not proceed with provisions that would limit access to the Lifetime Capital Gains Exemption.

 

Hopefully, this will mean that shares owned in a family trust will still qualify for the Lifetime Capital Gains Exemption.

 

4. Passive Income

 

The Finance Minister has said nothing about the rules related to passive income, but has, once again referred to the use of a CCPC to hold passive investments being “an unlimited, personal, tax preferred savings account beyond what is available to other Canadians”.

 

We can assume that there will still be an assault on the holding of passive investments in a CCPC, but it is too soon to speculate.

 

The devil is in the details and we haven’t seen details of anything yet.

 

I’ll keep you posted as more information becomes available.

 

- Chuck

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