publications 21 July, 2017

Tax Planning Using Private Corporations – Department of Finance Canada

On July 18, the Finance Minister of Canada presented new measures regarding tax planning using private corporations. A public consultation was also launched on that same occasion. Nothing is set in stone for now, but what are these proposals exactly?

The Department has mainly identified four tax planning items they wish to supervise more strictly, namely:

  • The income splitting;
  • The deduction for capital gains’ multiplication using a trust;
  • The investment income in a private corporation; and
  • The conversion of income into capital gains.

 Income Splitting

Some strategies were allowing the split of income between several people in order to take advantage of the progressive tax rates. Furthermore, the use of a family trust also allowed the multiplication of the capital gain exemption among the beneficiaries of the trust.

The proposed measures will ensure that only the people involved in the corporation will have the possibility to withdraw an income from it or to take advantage of the capital gain exemption on a sale of the corporation’s shares. Also, the use of family trusts will be limited when claiming the capital gain exemption for the beneficiaries.

 Tax Deferral

Making certain investments through a business corporation could represent an advantage due to low corporate tax rate. That way, the capacity to generate capital was increased.

No measure has officially been proposed for this item, which will be under review during the public consultation. However, suggestions were submitted in order to bring the corporate tax rate of passive income to a rate equivalent to the personal tax rate. It remains to be seen how this aspect can be addressed without penalizing entrepreneurs that wish to reinvest in their business.

 Conversion of Income Into Capital Gain

Finally, some tax planning were taking advantage of the fact that capital gain is only 50% taxable. Therefore, it was beneficial to convert income into capital gain so that the tax rate would be lower. With the new measures announced, it will no longer be possible to implement these strategies.

Additionally, the proposals wish to reconcile the business transfer from generation to generation without allowing undue tax advantage.

What about your structure?

 If such changes affect several structures in place, the fact remains that a tax structure aims to achieve several goals. Consequently, it is not necessary to draw conclusions too quickly or to immediately undertake a restructuring. It is better to assess the progress of the modifications proposed in the public consultation that will be taken place and to take the time to analyze the real impact of these potential changes on your tax planning.

 True to its values, the team of tax specialists of Hardy, Normand & associés S.E.N.C.R.L will make it its duty to be aware of the changes to come, to demonstrate its agility by exploring all potential solutions in order to fully optimize your tax situation and to amaze you once again.

Share this article