The Corporate Tax Change Whirlwind: Where Are We Now?

 

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By George Dube

A whirlwind of tax changes were proposed on July 18, 2017, threatening to affect entrepreneurs and investors, leaving few families unscathed. But after a 90-day “consultation” period and thousands of voices, letters, and commentary that came forth from Canadians in protest, where are we now? As shocking as the July 18the private company proposals were, the government announced a variety of relief measures in October, although the exact amount of relief remains uncertain until we see draft legislation, which is unlikely until early 2018.

Clearly the government has seen the tremendous tax advantages available to business owners and investors using corporations, family trusts (as compared to bare trusts), and, to a lesser degree, partnerships. These tax advantages were set up, in many cases, to support business and entrepreneurship, as was argued when the government proposed to remove them.

If you have been using a more elaborate structure than personal ownership to this point, you may have missed the boat in some cases, but you owe it to yourself and family to see if changes are warranted. Pros and cons exist, just as before, to developing a corporate structure. You need to speak with a qualified tax professional to determine what is right for you.

So, where do we stand and what do we do now? Let’s look at three areas of the proposals.

Income Splitting

We know there will be significant changes to how we can divide income among family members, particularly family members in the 18-to-24-year-old age category. While the government’s October announcements updating the tax changes promised some relief, as I mentioned above, we don’t know the exact nature of the relief yet.

Action to take: Remuneration planning will undoubtedly change for 2018, so you should consult with your tax advisor as soon as you can.

Estate and Succession Planning

Fortunately, the government has, at least temporarily, backed off a number of proposals that affected estate and succession planning as well as the use of family trusts. Some of these proposals would have resulted in 70%, 80%, and 90% income tax rates. However, we have seen ideologically where the government and Department of Finance would like to go, which is distinctly problematic for business owners.

Action to take: I highly recommend re-analyzing your medium- and long-term planning to provide the flexibility and preventive tax planning needed to reduce future taxes. I expect to see many more family trusts and corporations as a result.

Passive Investing

Again, we don’t yet have legislation to analyze, but we understand from the October announcements that the government will relax their original July 18th proposals. Passive corporate investing will not be nearly as nice as what we had prior to the proposals. One of the major changes is allowing business owners to enjoy $50,000, per family, of interest income annually from non-business investments that were purchased with business profits, at current tax rates rather than the higher ones originally proposed.

Philosophically, I have an enormous problem with the concept that a husband and wife will conceptually be forced to accept a tax limit of $25,000 each of investment income. The numbers are still to be clarified, but that is the concept at the moment. If such pension income is satisfactory for entrepreneurs and investors, I look forward to what I assume will be companion legislation restricting the pensions of politicians, Department of Finance employees, Canada Revenue Agency employees, and others who work for the government. Plus, will they be restricting their pension splitting to the same degree they are restricting ours? The government has been hammering us with the “fair” argument, but it seems that their definition is very different than mine.

Action to take: While time pressure has been eased on a variety of planning possibilities, resolve to analyze your situation with your advisor. I think we have only temporarily dodged a bullet. Creating advantageous changes to your investment, operations, structure, remuneration, and future are still possible!

Your Voice Was Heard

On a final note, a tremendous thank you goes out to all of you who communicated your concerns to your politicians and the Department of Finance. Make no mistake, you were the reason for the majority of the changes the government announced in October. Furthermore, just like last time, you cannot accept at face value the assurances of the government that changes will affect only a small percent of Canadians. This was clearly not the case with those proposed changes. Keep vigilant, as more changes are coming, and your political representatives need to know your opinions. They need to know you will not stand by idly when radical financial and deeply unfair policies are proposed.

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