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Federal finance minister Bill Morneau toured small businesses this week to announce some tax changes.
In addition to the change in the federal small business tax rate, Morneau announced updates to the proposed tax legislation released on July 18th, 2017. The changes to the proposed legislation were in response to feedback received during the consultation period which ended on October 2, 2017. These changes were announced on Twitter and on Facebook with formal releases posted on the Department of Finance’s website.
Very briefly, the proposed legislation released on July 18, 2017 creates significant changes to the taxation of private companies and their shareholders. This proposed legislation impacts the taxation of income allocated to shareholders, the access to the lifetime capital gains exemption on the sale of a business, farm or fishing property, the taxation on intergenerational sales and on death and the taxation of passive income (i.e. rents/interest/royalties/dividends) earned by private corporations.
The finance minister announced that the federal small business tax rate will decrease from 10.5% to 10% effective January 1, 2018 and decrease again to 9% effective January 1, 2019. This is the most tangible announcement released this week.
For BC companies the tax rate on the first $500,000 of active business income will be:
|Now to December 31, 2017||January 1, 2018 to December 31, 2019||January 1, 2019 and onwards|
Four changes to the July 18 tax proposals were announced this week. Updated legislation has not yet been released so it is difficult to know the actual implication of these modifications.
Lifetime capital gains exemption
Finance announced they will not move ahead with the proposed changes which impact the ability to claim the lifetime capital gains exemption.
Finance announced they will simplify the rules in the proposed legislation with respect to income splitting. Details were not released as to how these rules will be simplified.
Conversion of income into capital gains
The July 18, 2017 proposals would have resulted in very punitive tax consequences on intergenerational sales and the taxation of the gain upon the owner’s death which was perceived by Finance as a conversion of income into capital gains. Finance announced this week that they will not proceed with these proposals
Taxation of Passive Income
Finance announced that they will be moving ahead with the change in the taxation of passive income but that existing investment assets and the income on those investment assets will not be subject to these new passive investment rules. Finance also announced that to provide business owners with the ability to have some savings, these new passive investment rules will not apply to the first $50,000 of passive income earned per year.
These announcements are steps in the right direction but until legislation is drafted and released, we won’t be able to really analyze the impacts on these updates. The proof of the pudding is in the eating.
Sheryne Mecklai is a Partner with Manning Elliott LLP. Sheryne focuses mainly on estate planning and business succession services for Canadian owner-managed businesses in a wide range of industries. For more information regarding this topic, please contact us at 604-714-3600.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.