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Understanding the Proposed Tax Changes for Entrepreneurs

In July of 2017, Finance Minister Bill Morneau put forth a handful of proposed changes to corporate tax rules. These had far-reaching implications for any business with CCPC status. They’ve developed significantly since their initial introduction, so here’s what you should know.

Income Sprinkling

Income sprinkling — or income splitting — is a tax planning strategy that allows family members of corporation owners to earn income through the company at a lower marginal tax rate. The proposals aim to limit this strategy by only permitting the lower tax rate for family members who make demonstrable labour contributions to the company. These changes have since been simplified and amended, including exemptions for spouses or other family members under very specific criteria. However, for many larger private corporations, the limitations are still considerable, so you may want to consult with an accountant to navigate this change.

Corporate Capital Gains

Many CCPC owners have elected to save on tax expenses by converting after-tax earnings of the company into capital gains rather than receiving them as shareholder dividends. This is because the former is typically taxed at a lower rate than the latter. The changes proposed last year were designed to modify the existing rules and curtail this strategy. However, after responses from many business owners concerning unintended consequences, such as double-taxation on shares acquired between siblings or through intergenerational transfer of businesses after death, the Department of Finance has decided not to pursue these changes.

Passive Investment Income

Another affected practice is the earning of passive income with investments made through the company. Investing with surplus revenue from the corporation avoids paying personal tax on those investments until they are withdrawn later. Last year the Department of Finance proposed measures to tax this passive investment income at the top personal tax rate. Once again, revisions to this have been made more recently, such as a $50,000 annual threshold. However, larger corporations will still need to re-strategize if they have previously used this method to build savings cushions for economic downturns, retirement, or other purposes.

The security and success of your business rests significantly on how well you navigate a wide range of tax issues. The new tax policy changes will go into effect starting with the 2018 tax year, and we’re here to help every step of the way. Call (403) 456-0072 for a free consultation!

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