On July 18th, 2017 the Department of Finance released proposed changes to several tax rules affecting private corporations and its shareholders. These proposed changes will be of specific interest to our farmer members and our agents, many of whom operate their business through private corporations and who also may have a family trust for the benefit of family members. These proposals are currently undergoing public consultations until October 2, 2017. Many business owners, business organizations and tax professionals have been vocal in their negative response to these proposals. Notwithstanding the significant pressure, to date, the government has not relented on the proposals.
Overall these proposals are complex, factually dependant and uncertain in many respects. It is important to consider the potential impact of these proposals to your business in a timely manner so that any necessary changes can be undertaken prior to the end of 2017.
1) Changes to the lifetime capital gains deduction (“LCGD”) on dispositions of certain farm property (which includes qualified farmland, a qualified interest in a farming partnership and qualified shares in a family farm corporation).
a) Children under 18 years of age will not be allowed to use their LCGD on any gain.
b) Children will not be able to use their LCGD on appreciated value of farm property built up before their 18th birthday.
c) All capital gains allocated from a family trust will no longer be eligible for the LCGD.
d) The use of LCGD will be subject to a “reasonableness test” on capital gains realized on farm property where the gain is realized by an individual who is related to the principal owner.
There is a special election for the 2018 tax year for individuals to use their LCGD on farm property under the currently existing tax rules, however, there are numerous exceptions to the availability of the proposed election.
2) Capital dividends
The proposal related to capital gains also included changes that may affect capital dividends paid to shareholders. Capital gains are taxed at 50% therefore the other 50% is “tax free”. Under current rules, provided certain elections are made, this untaxed 50% portion of the capital gain may be paid out tax free to shareholders in the form of capital dividends. However, in certain circumstances the proposals could re-characterize what would otherwise be tax-free capital dividends to be treated as taxable dividends in the hands of shareholders.
3) Income splitting rules
Under current rules it is possible to pay dividends to young adult children and a spouse and have the dividend taxed in their hands at their marginal tax rates. This is very common for private corporations. The proposals will subject the dividends to a reasonableness test failing which the dividends will be taxed at the highest marginal rates. What is reasonable is a question of fact and can be challenged by the Canada Revenue Agency.
4) Investment income
It is common for businesses to hold and invest their retained earnings within the corporation. Currently there are special tax rules to ensure that investment income is taxed at a high rate within the corporation but when paid out to shareholders, a portion of this high rate tax is refunded. The proposals would eliminate the refundable taxes where the original income was taxed at the lower small business corporate tax rates. This could result in a significant overall tax cost on amounts which are reinvested within the corporation.
While the final rules will only be determined after the Department of Finance has had a chance to consult with stakeholders, it is important to be aware of the issues that may potentially be relevant to a particular business or investment arrangement. In some cases, action may be advisable before 2018.
What can I do?
1. Contact your MP and express your concerns. Click here to find your MP. Should you wish to send a letter directly to your MP, UFA has provided a form letter that you can use. All you need to do is add your MP’s name and your signature at the bottom of the letter. Click here to view.
2. Consult or seek advice from your tax advisers to determine the impact of these tax proposals to your company and personal tax situation.
What is UFA doing?
1. Click here to review UFA’s submission to the Minister of Finance.