Government announces changes to July 18th tax proposals

October 25, 2017

In previous posts (See: Who will be affected by the proposed changes to income tax law? and Sweeping changes proposed to the taxation of small businesses and their shareholders) we posted about proposed tax changes affecting small businesses in Canada.  Since the government announced the proposals on July 18, 2017, they had received significant backlash from the business community, both through the media and through formal comments sent in for consideration.

It appears that the government heard the concerns of Canadian business owners and their advisors, and as a result, the Liberal government took advantage of small business week (October 15-21) to announce changes to the proposed legislation.  Each day last week the government offered new insight as to how the legislation would change, including the following:

  • The small business tax rate would be reduced from 10.5% to 10% as of January 1, 2018, and further reduced to 9% as of January 1, 2019 (the small business rate generally applies to the first $500,000 of active business income earned by a Canadian controlled private corporation)
  • Proposals to reduce income sprinkling amongst family members would be simplified
  • Changes to limit access to the lifetime capital gains exemption will not be implemented
  • Proposals to limit the tax deferral opportunities related to passive investments will move forward with the following changes:
    • All past investments and future income earned from those investments will be protected
    • Businesses can save for contingencies
    • $50,000/year passive income can be earned without incurring a higher tax rate
    • Ensure incentives are in place for Canada’s venture capital and angel investors continue to invest in Canadian innovation
  • The government will not be moving forward with measures relating to the conversion of income to capital gains (which affected tax on death and the intergenerational transfer of businesses)

No draft legislation has been released which would implement the changes outlined above, so it remains to be seen what will actually change and the practical impact the revised legislation will have on Canadian business owners.  We will keep you posted on any future developments.

By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.

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