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Small Business Tax Changes For Private Corporations

November 3, 2017

Tax Question:

What are the updates to the proposed Canadian tax changes for private corporations and what will this mean for your company?


In October 2017, the Canadian government made a series of announcements to update their proposed tax changes from July 2017 in an effort to remove tax advantages to private corporations.


Reduction in the small business tax rate to 9%: The federal corporate tax rate that applies to the first $500,000 of active business income for a Canadian-Controlled Private Corporation will be reduced from 10.5% to 10% effective January 1, 2018, and 9% effective January 1, 2019. This will mean that your corporation will pay fewer taxes; however, due to tax integration, there will also be a corresponding increase in tax on dividends from a small business in 2018 and 2019 so that combined corporate and personal taxes paid is the same as if the income was earned all personally.

Sprinkling income using private corporations: The government is moving forward on restrictions on income splitting to family members through dividends, effective 2018 and subsequent years by introducing reasonability tests to measure contributions made by spouses, children and other family members. These include labour, capital or equity contributions, financial risks and past contributions.

Lifetime Capital Gains Exemption (LCGE): The government will not move forward with proposed measures to limit access to LCGE to multiple family members. This is positive news that avoids potential tax consequences on intergenerational transfers of family businesses.

Passive investment portfolios held inside a private corporation: The government will move forward with increasing taxes on passive investment income. However, the proposed rules will only be effective if annual passive income exceeds $50,000. This will not impact prior investments made by a corporation and the income earned on these investments as they will be grandfathered and not subject to new tax changes.

Converting private corporation’s regular income into capital gains: The government will not move forward with proposed changes to converting surplus income to a lower-taxed capital gain and stripping it from the corporation. There is still uncertainty about the draft legislation and the details on how some of these proposed tax changes will be implemented and we will await more details from the Canadian government.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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