I haven’t been posting with my normal regularity. In fact, I haven’t posted since the end of March. After the rush of activity starting on July 18th last year, with the introduction of Bill Morneau’s onerous, complex, and duplicitous tax proposals, it was time to let the dust settle.
Prime Minister Trudeau and Finance Minister Morneau continually speak of helping the middle class. Unfortunately, their actions belie their words. The Fraser Institute has stated that by 2019, 92.2% of ALL Canadians will be paying more tax. And that is before factoring in the Carbon Tax.
After constant criticism from every tax professional and business organization in the country, the Liberal government did back off from two of the worst provisions.
They backed down on the provision that would have denied the Lifetime Capital Gains Exemption (LCGE) to non-active family members who are shareholders in a private company.
They say that they reversed themselves on the provision to “stop” conversion of ordinary income into capital gains. This is, at best, disingenuous and at worst an outright lie – far from the first outright lie that Messrs. Trudeau and Morneau have propagated since July 18th, 2017. All they did was continue with the same rules and not make it even more onerous. If you beat your head against the wall, it will feel good when you stop, but that isn’t exactly progress.
The current rules still make it more expensive to sell one’s business to one’s children than to a non-family member, as I pointed out in my newsletter of November 20th, 2017.
They made 3 recommendations. First they recommended that the proposals introduced last July be withdrawn.
Secondly, they recommended an independent comprehensive review of Canada’s tax system with the goal of reducing complexity, ensuring economic competitiveness, and enhancing overall fairness.
Thirdly, they recommended that if the proposals were to be proceeded with, the implementation should be delayed until January 1, 2019 at the earliest, and that, among other things, an economic impact assessment be undertaken. This should be obvious, but the Department of Finance has either not completed such an assessment, or they did and for obvious reasons have failed to make it public.
TAX ON SPLIT INCOME (TOSI)
The introduction of the new Tax On Split Income (TOSI) rules have remained with some softening around the edges. It must be recognized that this is a direct attack on professionals and small businesses who have done their estate and retirement planning based on rules that have been in force for decades, and have not allowed sufficient time to regroup.
If the idea was to stop income splitting with family members, this could have been done by simply extending the current TOSI rules (generally referred to as the “kiddie tax”) to, say, age 24 in stead of 18.
Instead, Morneau has introduced rules so complex that almost a year after their initial introduction, seasoned tax professionals across the country are still debating what dividends will and won’t be caught by the new rules.
The current version will still leave too much room for subjectivity on the part of the Canada Revenue Agency in their application of the rules. Along with the draft legislation the Government tabled the CRA guidelines for the implementation of the new TOSI rules.
In a lengthy letter to the Minister of National Revenue, to which I have never had the courtesy of a reply, I pointed out many administrative problems that the CRA will have trying to deal with these new rules.
The current, and immediately previous, Chief Justice of the Tax Court of Canada have both stated publicly that the Tax Court does not have the capacity to cope with the volume of legislation that these new rules will generate.
Given the uncertainty about what these rules actually mean, most professionals will be advising their clients to object to any assessment under these provisions. Those objections will sit in a file for - without exaggeration - the next 10 or 15 years, until the Supreme Court of Canada rules on these provisions.
Just as an example, when dealing with dividends paid by a holding company, there are three different interpretations, all based upon documents from either the Department of Finance or the Canada Revenue Agency.
It is more crucial than ever to get good tax advice when contemplating dividends to family members. I would be pleased to discuss this with you to ensure the optimum tax result.
The one bright spot is that the TOSI rules will allow spouses to split income from a family business even if only one spouse was active in the business, once that individual has reached age 65. This will put some small business families on an equal footing with families who are already able to split pension income.
PASSIVE INVESTMENT INCOME
The lies and deception of Messrs. Trudeau and Morneau are even more blatant regarding the tax changes for private corporations earning passive investment income.
This will be the subject of a separate newsletter, likely dated July 18th – the anniversary of Morneau’s treachery against small business.