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Sweeping Tax Changes Affecting Business Owners

A more detailed, full-length article on the proposed changes is available in PDF format on this link.

The executive summary follows.

On July 18, 2017, the Government of Canada announced sweeping tax changes that will restrict and/or eliminate many tax benefits currently available to business owners operating through private corporations. The changes include, but are not limited to:

  1. Introduction of reasonability tests on dividends (and other income payments) to family members (either directly or through a trust);
  2. Limitations on the ability of family members to claim the $835,714 lifetime capital gains exemption (LCGE) on the sale of a business;
  3. Eliminating the ability of minors to claim the LCGE;
  4. Eliminating the ability to multiply the number of LCGE claims by holding shares of the company in a trust and allocating the gain on sale to beneficiaries of the trust (e.g. family members).

The changes noted above are effective January 1, 2018. Other changes are effective July 18, 2017 that aim to restrict transactions designed to convert what would otherwise be a dividend into a capital gain (to be taxed at lower rates). The Government is also considering ways to eliminate what they perceive as an unfair advantage received by corporate business owners who generate passive investment income in their corporation.

Share Your Feedback

The Government is accepting feedback from Canadians on the proposed changes until October 2, 2017 as they state they are committed to “ensuring the [tax] system is competitive and supports growth.” The accounting and legal community is currently preparing submissions in response to the draft legislation to address; unintended consequences identified, measures that introduce significant uncertainty into our tax system, and the impact of the proposed changes on Canadian entrepreneurs.

Next Steps

We are not recommending clients make changes to their corporate structures yet as the draft legislation may be modified before its application date. We will continue to carefully monitor these changes and will contact clients that may be affected by the proposed changes in the fall once there is greater certainty on the legislation we will be facing.

Disclaimer

While the information in this article is meant to be helpful, it is not meant to be advice for your unique situation.  If you are a Toronto business owner and would like to discuss your corporate or personal tax needs, please contact a Stern Cohen tax specialist.