What you Need to Know

The Government of Canada released a consultation on July 18, 2017 proposing changes to the way Canadian Private Corporations are taxed.


Who is Affected?

The proposed changes will affect small business owners and shareholders of Canadian Controlled Private Corporations.

What Specific Areas of Tax Planning are being Reviewed?

There are three main areas that the Government has chosen to focus:

1)     Income Sprinkling

2)     Holding Passive Income Inside a Private Corporation

3)     Converting Income into Capital Gains

How could I be affected?

The following is a summary of some key findings from the proposal, and their potential impacts to business owners and their families:

Income Sprinkling

  • Limiting the payment of a business` earned income (including dividends) to lower income family members who are shareholders, who`s level of active participation in the business does not match the level of compensation they are receiving.

  • Constraining the multiple use of the Lifetime Capital Gains Exemption (LCGE) by making children under the age of 18 as well as any gains accrued in a trust ineligible for the benefit, as well as those shareholders who do not actively participate in the business.

Holding Passive Income Inside a Private Corporation

  • Discouraging the investment of preferentially taxed business income in passive investments through:

    • Additional taxation prior to investing passively within the business, or

    • Elimination of refundable taxes for passive investments upon distribution from the business.

  • Making publically traded stock held within a business subject to higher personal tax rates upon distribution from the business.

Converting Income into Capital Gains

  • Eliminating the opportunity of business owners to structure a sale (or deemed sale) of all or a portion of their business at preferred capital gains rates vs. dividend rates.

  • Potential for taxation on both dividend income and capital gains (double taxation) on the execution of these type of transactions in the future if not structured correctly.

  • In the case of genuine intergenerational business transfers, changes would not allow the use of the LCGE in situations business shares are transferred to an adult child’s corporation regardless of whether the transaction is completed at fair market value.

If Passed, When will The New Rules Become Effective?

Income Sprinkling
According to the Consultation Document, the new income sprinkling measures would apply for the 2018 taxation year and later.  A special provision in the lifetime capital gains exemption measure would allow an affected individual to realize a deemed disposition to occur in 2018 under the current rules assuming the property was owned by the individual from the end of 2017 until the day of the disposition.

Holding Passive Income Inside a Private Corporation
According to the Consultation Document, the new rules would apply on a “go-forward basis” and will be further described in a future proposal.

Converting Income into Capital Gains
According to the Consultation Document, these changes will be implemented retroactive and would apply to shares disposed of, and amounts received or that became receivable, on or after July 18, 2017.

Impact and Next Steps

These proposed changes will have a significant impact on those who are shareholders of incorporated small businesses in Canada.  The Department of Finance has opened the Consultation Document and Draft Legislation to the public for comment until October 2, 2017, after which any corresponding amendments will be made and a submission to legislature will likely follow at a future undisclosed date.  Your Sagium Team will continue to monitor progress on this consultation throughout the Department’s request for input and up to the ultimate entry of some form of the changes into the legislature.

How We Can Help

Contact a Sagium Advisor to review your personal situation in the context of the proposed changes and assess the potential impacts on your comprehensive planning.