Taxation of private corporations

Update: May 15, 2018

With the federal government’s Budget Implementation Act currently before Parliament, CPA Canada was asked by both the House of Commons and the Senate finance committees to discuss the latest round of changes proposed to the taxation of private corporations.

Bruce Ball, vice-president of Taxation, CPA Canada, made appearances before these two prominent parliamentary committees on April 30 and May 8 to deliver three key messages:

1. Outstanding issues remain with the private corporation tax measures.
2. U.S. tax reforms are a game-changer, representing a real threat to Canada’s tax advantage.
3. Canada’s tax system needs a comprehensive review to address these and other matters related to competitiveness, simplicity, fairness and efficiency.

Read CPA Canada’s remarks.

Budget 2018 includes the promised details on the government’s plans to limit the deferral advantages from holding passive savings in a corporation, but takes a substantially different approach than previously announced. The government’s three key principles in designing these rules are to:

• protect passive investments already made by private corporations’ owners, including the future income earned from those investments
• implement a $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal five per cent rate of return) to give flexibility for business owners to hold savings, for example, for sick leave, maternity or parental leave, or retirement
• maintain incentives to continue to encourage Canada’s venture capital and angel investors to invest in the next generation of Canadian innovation.

Budget 2018 accomplishes these goals through two measures, described below. These measures take effect for taxation years that begin after 2018. We welcome the delayed effective date to allow business owners and their advisors to adjust to the new rules, as we recommended in earlier submissions to the government. Further, while we are pleased to see that the current proposals are simpler than earlier indications, such rules should be assessed as part of a detailed review of how they fit within the broader tax system.

Limiting access to small business tax rate

Under the first measure, the government proposes to reduce the business limit on a straight-line basis for Canadian controlled private corporations (and their associated corporations) having between $50,000 and $150,000 in investment income. This measure will operate alongside the current business limit reduction for CCPCs with taxable capital over $10 million, so that the business limit will be the greater of the reduction under the new measure and the existing reduction based on taxable capital. The budget includes details on the types of passive investments that are included in calculating the new limit.

Refundability of taxes on investment income

Under the second measure, the budget aims to end the tax advantage for larger CCPCs by paying out lower-taxed dividends from active income taxed at the general corporate rate and still claiming refunds of taxes paid on their investment income which is intended to be taxed at higher tax rates.

The budget introduces a second refundable dividend tax on hand (RDTOH) account, which will track refundable taxes (Part IV tax) on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account. The current RDTOH account (now called “non-eligible RDTOH”) will track refundable taxes on investment income (under Part I) and non-eligible portfolio dividends (under Part IV). Refunds from this account will be obtained only on paying non-eligible dividends.

Other outstanding measures for private corporations

Among other previously announced measures, Budget 2018 says the government intends to move forward with the small business tax rate reductions announced on October 16, 2017 and the measures to address income sprinkling announced on December 13, 2017. Unfortunately, unlike the passive investment proposals, the government did not simplify the rules or delay their application to give business owners time to adjust, as CPA Canada and others have recommended.

Update: February 16, 2018

The Government of Canada will deliver the federal budget on Tuesday, February 27, 2018. Once tabled, CPA Canada will review and analyze the budget for any measures relating to the taxation of private corporations. Please monitor this website for possible updates.

Update: December 14, 2017

Finance Canada has published details of its proposals aimed at simplifying the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures.

CPA Canada is reviewing all the documents released. In the interim, however, it appears there are attempts at simplification but the latest changes are not simple.

From the details that have just been released, initial analysis seems to indicate that the new rules around income sprinkling will be beneficial to some, but we still have concerns around their complexity. For example, the proposed safe harbour rules are not simple. In particular, one of the rules is based on whether a family member worked for 1,000 hours in prior years. It is not clear what documentation will be needed to prove this if the CRA asks for substantiation. There also appears to be a number of ways that a spouse will be exempted from the rules. Due to this, CPA Canada believes there should be a general exemption for spouses.

CPA Canada believes there is no reason why these changes have to be rushed through now. The government could defer application of the planned changes for a year, as CPA Canada has recommended to Finance Canada.  Many other business organizations – as well as the Senate Committee on National Finance in a new report dealing with the private corporation tax changes – are calling for the federal government to delay their implementation until January 1, 2019.

In Fair, Simple and Competitive Taxation:  The Way Forward, the Senate Finance Committee also echoes CPA Canada’s call for an independent comprehensive review of Canada’s tax system – aimed at reducing complexity, ensuring economic competitiveness and enhancing overall fairness.

As we go forward, CPA Canada will continue to consult with members and other affected stakeholders to further analyze these important tax changes and their overall impact on Canadian taxpayers, businesses and the economy.  We will also be examining our options on the best way forward to continue to act in the public interest, and we will keep the profession informed of any significant developments.

Update: November 9, 2017

Chartered Professional Accountants of Canada (CPA Canada) recently convened a conference call with members of its tax committees and other stakeholders to obtain input on Finance Canada’s follow-up measures – announced mid-October – regarding the proposals to address tax planning using private corporations.

We heard a number of key points. While the follow-up measures appear to represent some steps forward, these proposals continue to raise many questions and concerns.

There is a considerable lack of clarity over which proposals will proceed as originally announced, which proposals will be amended and which proposals will be abandoned. The follow-up measures are also unclear as to when the various proposals will take effect.

On the passive income changes, some have expressed concern that these proposals may be introduced in the 2018 budget (expected in February or March) but with an effective date of January 1, 2018. It is our opinion that the federal government needs to make a clear statement that these changes will not apply retroactively.

On the income sprinkling proposals, CPA Canada continues to believe that the tax system as a whole would be better if the tax on split income proposals were based on a bright-line test rather than a highly subjective reasonability test that must be considered for any dividend paid to a family member.

We are also concerned that the Canada Revenue Agency has not had enough time to develop its positions and related guidance that is required to administer the new rules and to provide compliance advice to taxpayers and their advisers.

Taxpayers and tax practitioners need ample time and sufficient detail to review and understand these complex tax proposals and to determine their implications. In the current situation, many private business owners are not clear how they should proceed and their tax advisers do not have sufficient information to assist them.

With these considerations in mind, CPA Canada has written to the deputy minister of Finance Canada to share member views and concerns, seek clarification on the proposals, and advance some key recommendations:

Recommendation 1:  Undertake a comprehensive tax review

There has not been a thorough review of Canada’s tax system in 50 years. Such a review is long overdue. CPA Canada continues to recommend that the private corporation proposals should be set aside and reconsidered when a comprehensive tax review is undertaken.

In the absence of such an exercise, CPA Canada wishes to make further recommendations as follows:

Recommendation 2:  Provide certainty on which proposals will proceed

In the absence of draft legislation, CPA Canada recommends that the government should prepare and publish a measure-by-measure explanation of the status and its intentions regarding each of the original proposals, including their effective dates and transitional measures as soon as possible.

Recommendation 3:  Adopt a formal and more expansive, transparent, two-way approach to consultations

In the interests of pursuing best practices, CPA Canada recommends that Finance Canada introduce a formal process for designing new tax legislation that adheres to principles of procedural fairness, transparency and consultation. This includes open analysis and discussion with businesses, the tax community and other stakeholders, together with an appropriate implementation timetable and transitional rules that would give affected taxpayers a reasonable amount of time to bring their affairs in line with the new policy.

Recommendation 4:  Delay the effective dates of the proposals until 2019

If the government does not wish to delay the proposals pending a comprehensive tax review, CPA Canada believes the public interest would be served by delaying the effective date of the proposals to 2019 at the earliest.

Update: October 25, 2017

Follow-up announcements: Tax planning using private corporations

Last week, Finance Minister Bill Morneau announced a series of follow-up measures around the government’s plans for the taxation of private corporations. Below is a recap of the main announcements:

• Simplify the rules pertaining to the July 18 proposal involving income sprinkling. The government advises that corporations with family members who meaningfully contribute to the business will not be impacted by the proposed income sprinkling measures. In addition, the government will not move forward with the proposed measures to limit access to the Lifetime Capital Gains Exemption.
• Allow a $50,000 threshold on passive investment income a year. The government advises that this measure will provide business owners with more flexibility to build a cushion of savings for business purposes – for example, to deal with a possible downturn or finance a future expansion, as well as to deal with personal circumstances, such as for parental leave, sick days or retirement.
• Not move forward with measures relating to the conversion of income into capital gains. The government heard the concerns that the original measures could result in several unintended consequences, including in respect of taxation upon death and potential challenges with intergenerational transfers of businesses. In the coming year, the government will continue its outreach to business owners and others – including farmers and fishers – to develop proposals to better accommodate intergenerational transfers of businesses.

CPA Canada and the Joint Tax Committee (Canadian Bar Association and CPA Canada) raised a number of serious concerns about the original tax package, announced on July 18. While last week’s announcements may be promising, further clarifications are required.

We once again wish to thank members of CPA Canada’s tax advisory committees, provincial CPA institutes and individual CPAs who contributed their views and suggestions on the package of proposals concerning the taxation of private corporations.

Our initial reaction is that these follow-up measures appear to be positive steps, however they will require further analysis. Bottom line: CPA Canada continues to believe that a comprehensive review of Canada’s tax system is needed.

Our work is not finished. Going forward, CPA Canada will continue to actively engage with the federal government and other stakeholders on the private corporations proposals as we work to improve these measures to ensure fairness, simplicity, efficiency and a competitive tax regime.

Update: October 20, 2017

CPA Canada speaks out on private corporation taxation at Senate Finance Committee

Speaking on October 18 at the Standing Senate Committee on National Finance, Bruce Ball, CPA Canada's vice-president, Tax, reiterated CPA Canada’s call for a comprehensive review of the country’s tax system.

The presentation came during a week where the federal government has been making a series of follow-up announcements around its plans for the taxation of private corporations.

This week’s measures do not change CPA Canada’s overall position. As a long-time advocate of tax reform, CPA Canada told the senate finance committee that the private corporation tax proposals should be considered as part of an extensive review of the tax system.

As noted during the Senate presentation, ad hoc incremental fixes do not constitute a long-term solution. They often create further complexities, inefficiencies and unintended consequences down the road.

CPA Canada believes that tax policy is an essential lever to achieve key economic and social objectives in Canada. Other national and provincial organizations are joining the call for a comprehensive review of the system.

Read the remarks.

Update: October 13, 2017

CPA Canada’s full submission on Tax Planning Using Private Corporations is now available.

Update: October 12, 2017

CPA Canada’s October 2, 2017 letter to Finance Canada and the executive summary of its submission are now available.

CPA Canada’s full submission on Tax Planning Using Private Corporations is scheduled to be posted later this week.

We want to hear from you

Stay in touch with us on this important issue.

As developments arise, we will be posting updates to our web site.

Should you have any further views on this topic, please feel free to share them with us.

Update: October 5, 2017

Your input is valued

CPA Canada has made a formal submission to Finance Canada in response to its consultation on Tax Planning Using Private Corporations.

The submission benefited greatly from the insights and input of a broad range of CPA Canada members and other stakeholders, including members of CPA Canada’s tax committees, the provincial CPA institutes and members at large who shared comments by email. All comments were considered in the development of the submission.

We want to sincerely thank everyone who contributed to the development of CPA Canada’s submission.

Finance Canada tax proposals are not in the public’s best interest

Our submission raises serious concerns from a policy and public interest standpoint regarding the federal government’s proposals and the consultation process.

In CPA Canada’s view, the July 18 proposals are contrary to the public interest due to the unintended consequences they would produce for small business owners and for Canadians at all income levels. This package of proposals is so complex and so broadly targeted that when considered in combination with other recent changes, significant risk is created to the integrity of the tax system, to the financial prospects and competitiveness of Canadian private businesses, and to the Canadian economy overall.

Given the scope and importance of these changes, CPA Canada believes it’s crucial to the public interest for the government to examine all the implications and alternatives before enacting any changes into law.

Comprehensive tax review is needed

In fact, in CPA Canada’s view, instead of making major tax changes on an ad hoc basis and adding to existing tax complexity, the federal government should launch a comprehensive review of Canada’s tax system. Such a review should focus on balancing objectives such as fairness, simplicity and efficiency for all Canadians while fostering sustainable economic growth.

Our work will continue. As a strong and long-time advocate of tax reform, CPA Canada remains committed to working with the federal government and other key stakeholders to bring needed improvements to Canada’s tax system so that all Canadians benefit.

Check back here for updates

Next week we will post CPA Canada’s October 2 letter to the Deputy Minister of Finance, the Executive Summary and the full submission on Tax Planning Using Private Corporations to our website.

Should you have any further views on this topic, please feel free to share them with us.

Update: September 29, 2017

On Parliament Hill, CPA Canada calls for a comprehensive review of Canada’s tax system

On September 27, Bruce Ball, vice-president, Tax, CPA Canada, appeared before the House of Commons Standing Committee on Finance for the pre-budget consultations in advance of the 2018 federal budget.

One of CPA Canada’s key and long-standing recommendations is the need for a comprehensive tax review, which is becoming more urgent on account of the layering of fragmented and complex tax changes that continue to be made without consideration to the impact on the tax system as a whole. The July 18th proposals involving tax planning strategies for private corporations are the latest example.

In its remarks, CPA Canada told the parliamentary committee that these proposals, in many respects, run counter to the basic principles of sound tax policy – fairness, simplicity, competitiveness, efficiency, certainty, appropriately targeted and consultative.

The national organization believes that these tax proposals are not in the public’s best interest. CPA Canada is urging the federal government to consider setting aside these proposals pending a comprehensive review of the income tax system.

Read the remarks.

Update: September 20, 2017

Our organization, in conjunction with CPA Ontario, brought Canada’s finance minister directly to our members to discuss the government’s plans around the taxation of private corporations.

The Minister of Finance, Bill Morneau, spoke to CPAs attending The ONE National Conference on September 18, 2017. The Minister delivered keynote remarks, engaged in a dialogue with Joy Thomas, president and CEO, CPA Canada, and took questions from the audience.

The proposed changes could have significant impacts on private corporations of all sizes, their owners and families, and Canada’s economy overall. Given the scope and importance of these changes, CPA Canada believes it’s crucial to the public interest for the government to examine all the implications and alternatives before enacting any changes into law.

We encourage you to view the segment to gain an understanding of the government’s position, the profession’s concerns and how CPA Canada is committed to working in the public’s best interest.

CPA Canada’s voice being heard

Here's a recap of some of the actions taken by CPA Canada:

• In August, we called on the government to extend the consultation period to ensure that all of the concerns and potential impacts can be thoroughly researched and analyzed. Our request was in a letter to the Deputy Minister of Finance Canada.
• Since the proposals’ release in July, we have had discussions with advisors in the Finance Minister’s office and in the Prime Minister’s office to convey some of the views and concerns we’re hearing from our members and our public interest concerns.
• We have hosted meetings with tax practitioners, legal practitioners and other stakeholders to evaluate the proposals, identify potential concerns and develop recommendations.
• We have stayed in communication and shared information with a coalition of stakeholders who have similar concerns about the proposals.
• We invited CPA members to provide their comments to help inform our submission through the CPA Canada website.
• We have been active in consultation events hosted by other national organizations, such as the Society for Trust and Estate Practitioners (on August 17) and the Canadian Tax Foundation (a conference on September 25).
• We presented a webinar for members on September 12.
• We are involved in two submissions that will be made to the government. The submission by the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada will focus on the technical concerns of the proposals. CPA Canada’s submission will focus on the public interest concerns and tax policy considerations.

 The deadline for comments to Finance Canada is October 2, 2017.

Update: August 30, 2017

CPA Canada is preparing its response to Finance Canada’s consultation paper on proposed changes to tax planning using private corporations. The submission will assess the proposals from the perspective of the public interest. It will also be informed by the input we have received from CPAs who have raised concerns about the effects of the changes.

While the final text and recommendations are still subject to ongoing analysis and consultation, CPA Canada’s submission will stress the principles of simplicity, efficiency, and fairness in the tax system and focus on how the changes may affect the public interest goals of sustainable economic growth and competitiveness.

CPAs who wish to communicate their views directly to their federally elected representatives may find the following key points – which will be reflected in CPA Canada’s submission -- useful in supplementing their own views.

Sustainable economic growth and competitiveness

• To support sustainable economic growth in the public interest, Canada’s tax system should reinforce our competitive position in the global economy and provide the proper incentives for business owners to take risks and invest in our economy.
• The current proposals are significant tax policy changes which, if implemented, could act as a barrier to business investment and job creation by further raising the cost of doing business in Canada, threatening our competitive position in the long run.

Fairness

• Fairness in the tax system is an essential principle that may not be improved as a result of the proposed changes, which will reach across taxpayers at all income levels.
• These corporate structures and rules have been available for as long as 40 years in some cases, and are used by private corporations and businesses of all sizes. If the government is going to change tax policy, it should allow for a reasonable transition period and appropriate grandfathering.
• A wide variety of business owners choose to structure their business through an incorporated entity for a number of reasons, including limitation of liability and tax incentives, in order to ensure their competitiveness and sustainability.
• Family-owned businesses, middle-class Canadians and entrepreneurs striving to build Canada’s economy will be among those affected by these changes.

Simplicity

• Adding further complexity to an already complex tax system in Canada, as these proposals may do, will work against tax simplification and its associated benefits for government, taxpayers and business.
• A simpler and more efficient tax system would assist taxpayers with compliance, improve fairness and increase tax revenue collections that are necessary to support economic and social challenges.

Efficiency

• Making ad hoc changes to long-standing legitimate tax structures, that are utilized by a wide array of businesses of all sizes and income levels, may not be an effective way to improve Canada’s tax system and it could lead to unintended outcomes and require further fixes.
• These proposed tax changes will likely increase the tax and administrative costs of running a business, which could adversely impact the entrepreneurial drive.

In CPA Canada’s view, Canada’s tax system needs a comprehensive review to improve its simplicity, efficiency, fairness and competitiveness. By adding complexity and inefficiencies, these proposals may work against that goal. Further, they could undermine the government’s focus on building an entrepreneurial, knowledge-based, and innovation-driven economy.

In the public interest, CPA Canada has undertaken two recent actions. First, CPA Canada has brought views and concerns forward to the attention of the Finance Minister’s Office. Second, as previously mentioned, CPA Canada has called on the government to extend the consultation period to ensure that all of the concerns raised can be thoroughly researched and analyzed, and the potential impacts on Canadian businesses and individuals can be properly identified and estimated.

Reminder

The deadline for submissions to Finance Canada in response to the consultation paper is October 2, 2017. Finance Canada is receiving responses via email. CPA Canada continues to welcome your comments.

Update: August 22, 2017

The July 2017 paper  from Finance Canada and accompanying draft legislation set out proposals that would eliminate some commonly used tax planning strategies available to owners of private corporations.

These changes could have significant impacts on private companies of all sizes, their owners and families, and Canada’s economy overall. Given the scope of these changes, CPA Canada believes it’s crucial to the public interest for the government to examine all the implications and alternatives before enacting these proposals into law. Actions that CPA Canada is undertaking include:

• requesting the government extend the 75-day consultation period beyond October 2, 2017 to allow adequate time for research, analysis and understanding of the proposals’ wide-ranging impacts
• hosting meetings with tax practitioners, legal practitioners and other stakeholders to evaluate the proposals, identify potential concerns and develop solutions
• inviting CPA members to provide their comments to help inform our submission
• taking an active role in consultation events hosted by other national organizations, including the Society for Trust and Estate Practitioners and the Canadian Tax Foundation
• supporting the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada in the development of its submission to the consultation

These and other activities are helping CPA Canada to develop its response to Finance Canada’s consultation. In a detailed submission to the government, CPA Canada will assert the principles that any changes to tax policy in this area should be designed to ensure tax fairness for all taxpayers while avoiding undue complexity, and also to promote and support entrepreneurialism and competitiveness in Canada.

Further, tax policy changes of this magnitude should be developed with extensive consultation and collaboration with the tax community, Canadian businesses and other key stakeholders. Ideally, CPA Canada believes that instead of adding more complexity to the tax system with these changes, the government should consider them within a comprehensive, top-to-bottom review of Canada’s tax legislation.

If you have thoughts on the private corporation tax proposals that you’d like to share with CPA Canada for consideration, please email us with your ideas.

July 28, 2017

Following up on a 2017 federal budget commitment, the Department of Finance Canada has launched a public consultation process to review the use of tax planning strategies involving private corporations. 

We recognize that this is an issue of importance to members and to the Canadian public in general. As we consult with members and other stakeholders, our overriding consideration will be to ensure the public interest is served by Canada’s tax system.  

The Minister of Finance has stated that the “government is committed to increasing the fairness of the tax system, while ensuring that the system is competitive and supports growth.” CPA Canada believes that the consultation process must consider the issue from a wide array of perspectives, such as fairness, simplicity and efficiency. It must also ensure there are measures in place to encourage and support business creation and development for a stronger economy that benefits all Canadians.

CPA Canada will carefully review the government’s proposed changes and submit its views and recommendations to Finance Canada as part of this public consultation process. If you have any comments on the consultation document for our consideration, please submit your views.