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Income tax changes: Interim strategies
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Income tax changes: Interim strategies

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Income tax changes: Interim strategies

April 6, 2020

Income tax changes : Interim strategies

By now, you are probably sick and tired of hearing about the government's proposed Income tax changes. I can't blame you. I'm tired as well. But... this is the most significant change to the tax act in decades, so, I am still talking about it,,,I've been reading voraciously about it, trying to understand exactly what is being proposed. While some of the proposals are specific, others are less so. I'll start with the most specific, restrictions on income splitting, and suggest a course of action for now, then I'll look at the less specific, being the restrictions on passive investments within the corporation.

Income sprinkling

The government seems focussed and determined on bringing in these Income tax changes. While some news articles suggest that the government will delay some of the changes, I suspect income sprinkling will be the first victim. I fully expect these changes to become law for the 2018 tax year.Right now, you can issue dividends to family members who own shares in your corporation, even if they are not involved. The policy behind it is that share owners as owners have entitlements to dividends notwithstanding the fact they are uninvolved.This will change. The government's income tax changes will bring in a reasonability test. CRA will look at the the family member's involvement in the business and the capital invested by that individual. CRA will then compare that to a similar situation where the person is not related to the business owner.Essentially, if the family member has not contributed capital, you will have difficulty justifying the payment of dividends. It doesn't matter that you have not paid significant capital to get into the business. Your time and efforts will be the investment. Unless your family members contributed equally, they will not be eligible for dividends. To make it even more difficult, the new rules will distinguish between children aged 18 to 24 and those above the age of 25, making it more difficult to pay dividends to the former. The government will tax those under 24 at the highest margin available.

Strategies

First, if you are considering a restructuring, you should hold off. Many of the tax plans in place now take advantage of income splitting. As the government will (most likely) terminate these this year, restructuring is ill advised.Secondly, as this will be the last year (most likely) whereby income splitting is allowed, you should consult with your accountant. You may wish to take advantage of the last opportunity to withdraw as much as you can to take while spreading the tax liability to all share owners.

Passive income

The government issued fewer specifics on how it will limit a corporation's ability to invest in passive investments like real estate or investment portfolios. They are floating different approaches, one of which was implemented and then repealed in 1972 because it was too complex. The net effect of the proposals does seem to mean that the government will tax passive investments in punitive manner. Under all scenarios an individual will pay less in tax than a corporation. In some cases, a corporation may pay over 70% in taxes.KPMG accountants have had discussions with the finance department. According to the finance department, the new rules will only apply on a go-forward basis. So the government should spare current passive investments. Government officials also seem to indicate that they will phase in the changes over a longer period of time.

Strategies

These are more difficult to foresee. If the information provided to KPMG is accurate, you would have time to make those passive investments, but you would want them to take effect as soon as possible. So, if you are considering the purchase of real estate, then you should act quickly.This post is akin to looking into a crystal ball. I am unable to provide solid advice with little risk. These are still only proposals. Only time will tell whether they become law. Until then, it's all our best guess. You should consult with your lawyer or accountant to see how these changes will affect your specific situation.Disclaimer - LegaleseI am posting this article for informational purposes only. The content does not constitute legal advice or solicitation. It does not create a solicitor client relationship (this means that I am not your lawyer until we both agree that I am). If you are seeking advice on specific matters, please contact Philippe Richer at richerp@tlrlaw.ca, or 204.925.1900. We cannot consider any unsolicited information sent to the author as solicitor-client privileged (this means confidential).

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