Tax Change Alert

 

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Are you a business owner? A shareholder in a private company? Own real estate? Have, or plan to have, real estate holdings in a trust or corporation? Are you a professional service provider?  Read on for proposed tax changes that could impact you drastically.

It is always important to constantly educate ourselves and be aware of changes that could impact us and our real estate investments. Such changes are currently being proposed by the Federal Liberal Government that will dramatically shift one’s ability to operate or plan for the future.

The Federal Government has proposed corporation tax changes, which if implemented, would be far-reaching and would impact all Canadians who use private companies, including family businesses and incorporated professionals. BDO Canada has released an article with a detailed review of the Federal Government’s proposed corporation tax changes and what that will mean for you. The Federal Government intends to apply these changes in 2018 and later taxation years.

These are drastic changes being proposed. They will directly and negatively impact many middleclass Canadians who have built their own businesses and professional careers.

Click here to read BDO’s article in full.

Here are some key highlights from the article:

Income splitting

One change they are suggesting impacts income splitting. If this change takes place, business owners, including professional service firms, will be unable to split their income with their family members in the way they currently do. They will be limited in the way they use payment of dividends on separate classes of shares held by their family members, professional service firms will be unable to split their income with family members through the use of a service vehicle. A service vehicle, for example, be a corporation or partnership owned by family members that provides certain services to the professional firm for a fee.

As a real estate investor, you’ll want to familiarize yourself with the proposed changes, especially these:

  • Extension of the tax on split income (TOSI) rules
  • Constraining access to the lifetime capital gains exemption (LCGE) 
  • Trusts
    • The proposed measures would ensure that, subject to certain exceptions, gains that accrued during the time that property was held by a trust will no longer be eligible for the LCGE
    • Similarly, if the shares of a business are held in a discretionary family trust, it is critical that you contact your accountant or a BDO advisor in order to help you determine whether you might benefit from making this election in 2018. 

Holding passive investments inside a private corporation

About the current system for holding passive investments inside a private corporation:

  • An owner or manager who has a business in a corporation will pay essentially the same amount of tax on that business income as they would if that was their personal income.
  • Allows for a tax deferral of the individual tax payable if the shareholder leaves the funds in the corporation.

The government wants to change these rules because they believe that the current tax deferral rules mean a significant tax advantage to owners of private corporations.

About the proposed changes to passive investment income:

  • Includes identifying the source of the funds in a private company that is being used to generate income.
  • Then the government would determine which tax rate applied when earning that source of funds.
  • With this new system, the government also plans on removing the refundability of passive investment income taxes where earnings used to fund passive investments were taxed at low corporate tax rates.

Converting income into capital gains

About the current system:

The government also wants to change the rules to prevent any extra income of a private corporation from being converted into capital gain and being stripped from the corporation.

About the proposed changes and their impact:

Their plan is to expand that anti-avoidance rule and to put in place a new anti-stripping rule. If these two measures take place, the way shareholders of private corporations extract funds from their corporations and the ability to plan to convert corporate surplus (that would normally be taxable as dividends or salary) into lower-taxed capital gains, will be impacted.

Summary:

We are surprised! The government promised Canadians a consultation paper, but instead we’ve received proposals with effective dates and draft legislation. These proposals will negatively impact Canadians who are starting or running their own businesses – the very Canadians who are helping to grow our economy and create jobs, the Canadians who deserve our support.

Currently, small businesses pay less tax than big businesses or employees who earn salary because those starting and operating their own businesses risk their personal capital and Canadians and our economy benefit from the success of small businesses. Hard work and entrepreneurial action should be rewarded, not punished.

What can you do? Take action, now!

  1. Read the full BDO article in full and get a better grasp on what these changes will mean for you if they come into place.
  2. Contact your accountant and/or BDO advisor
  3. Your opinion matters! Submit feedback to the government (by October 2, 2017)
    • BDO will be submitting feedback to the government on these proposals and will compile yours too
    • Please contact a BDO advisor with your views and opinions as soon as you can in order to have your voice heard.
    • Contact Bill Morneau or email your own MP with your concerns

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