Update on the July 18th, 2017 Proposed Income Tax Legislation

Finance Minister Bill Morneau announced several tax changes last week, including updates to the proposed legislation released on July 18th, 2017.

Changes to the Small Business Corporate Tax Rate

Morneau announced that the federal small business tax rate will decrease from 10.5% to 10% effective January 1st, 2018, and will decrease again to 9% effective January 1st, 2019.

Changes to the July 18th Tax Proposals

Four changes to the July 18th tax proposals were also announced last week. Updated legislation not yet been released, so it is difficult to say with certainty what the impact of these changes will be.

Lifetime Capital Gains Exemption

The Government announced that they will not be moving forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption.

Income Splitting

The Government announced that they intend to simplify the rules in the proposed legislation with respect to income splitting—rules which would limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who do not contribute to the business.

Corporations with family members who meaningfully contribute to the business will not be impacted by the proposed measures on income sprinkling.

Conversion of Income into Capital Gains

The July 18th proposals would have resulted in very punitive tax consequences on intergenerational sales, and the taxation of the gain upon the owner’s death (which was perceived by the Government as a conversion of income into capital gains). The Government announced that they will not proceed with these proposals.

Taxation of Passive Income

The Government announced that they will be moving ahead with the proposed change to the taxation of passive income, but that existing investments and the income earned from those investments will not be subject to these new passive investment rules.

They also announced that, in order to provide more flexibility for business owners to hold savings, these new passive investment rules will not apply to the first $50,000 of passive income earned per year—an amount that is exceeded by only about 3% of corporations.

Our Take

These announcements are steps in the right direction, but until legislation is drafted and released, we won’t be able to fully measure the impact of these changes. We would also like to point out that these changes still do not seem to stimulate any measure of economic growth. Nor do these measures seem to achieve the goals of The Department of Finance which are to reduce complexity of the tax system and help the middle income earner.

The announcements simply repeal and amend aggressive tax measures which The Department introduced in the first place. What these announcements doaccomplish is an increase in the cost of compliance for small business owners.

We will continue to monitor these developments and keep you informed of any significant updates in the months to come.

If you have any questions, or if you’d like to meet with us to review your current strategies and see how best to prepare for any possible changes, please don’t hesitate to contact us at 604-534-7701 or info@jeskeco.com.