November update: Status of proposed tax changesNovember 30, 2017
In an earlier post, we blogged about the announcements the government made regarding changes to the July 18th tax proposals affecting small business owners. In the October announcements, the government indicated that the changes to the taxation of passive investments would be announced in the 2018 Federal Budget, that it would not be going ahead with proposals relating to the lifetime capital gains exemption or the conversion of corporate surplus into capital gains, and that it would be tabling revised legislation targeting the remaining measures “later this fall”.
Based on the statements released in October, we expect to see split income rules released this fall, passive investment rules released with the 2018 federal budget, and revised conversion of corporate surplus to capital gains rules following consultation by the federal government over the next year or so (these rules were initially effective as of July 18, 2017). No date has been set for any changes to the capital gains exemption.
Weather notwithstanding, we are still in the “fall” season, and the government technically has until December 21st (the first official day of winter) to meet their “fall” deadline. Unfortunately, taxpayers may not have much time to react to any changes that the government proposes in the revised legislation, if the effective date of the changes is still January 1, 2018 as the government has suggested it will be.
Of the July 18th proposals, while the government indicated changes would be made to the income sprinkling proposals, the overall implementation of these rules seems to be a certainty. With that in mind, and expecting a possible effective date of January 1, 2018, business owners should turn their mind to paying dividends to family members who are not active in the business on or before December 31, 2017. Subject to any changes proposed to the July 18th legislation, the new rules provide that dividends paid to family members will be subject to a reasonableness test, and if the distribution to a family member is not “reasonable” when looking at their contributions to the business, the dividend will be taxed at the highest marginal tax rate for the individual receiving the dividend. Finance says the new rules with be “effective for the 2018 and subsequent taxation years.”
Although the law is in a state of flux, it is a good idea to consult with your tax advisor before the end of the year to determine if you should take any steps before 2018.
By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.