July 18, 2017 was a relatively quiet day in my office. That is until I received a flurry of emails regarding a release by the Department of Finance. In particular, the Department of Finance issued draft legislation which, if passed, will significantly change the nature of tax planning for Canadian private companies and their shareholders. The proposed changes will impact both current structures that many Canadian private companies have in place, as well as future planning that they will be able to engage in.
The rationale for the announcement is that the Government is continuing with its efforts to close tax loopholes. It sees amending the existing rules that apply to Canadian private companies and their shareholders as part of its ongoing effort to create tax fairness. There appear to be three areas that the Government is specifically targeting. They are, strategies and structures that allow for the sprinkling of income, holding a passive investment portfolio inside a private corporation and converting ordinary income into capital gains. Overall, the proposals will have an impact on annual tax planning strategies applied to owner-manager remuneration. More importantly though, the proposals, appear to eliminate a post-mortem tax planning strategy that is intended to avoid the double or triple tax that can result to an estate of a deceased shareholder of a Canadian private company. It is unclear how this might be consistent with a goal of creating tax fairness.
As part of the Government’s related goal of bolstering confidence Canadians have in their Government and their economy, the Government also released a consultation paper and an invitation to the public for comments. Notwithstanding the consultation process that is to happen, it is important to note that the proposed tax measures are to be effective as of July 18, 2017. This deadline will undoubtedly have an impact on tax planning for estates of shareholders whose deaths occur between now and the effective date. Other proposals are stated to be effective after 2017.
I expect many professional organizations, such as STEP Canada, will be making submissions as part of the consultation process. To the extent you are a member of a professional organization that has a voice in the private company space, you may want to encourage that organization to make its own submissions.
Stay tuned for more blogs on this important topic.