WHEREAS on July 18, 2017, the Honourable Bill Morneau, Minister of Finance, announced changes to three areas of tax planning carried out by private corporations; and
WHEREAS there has been significant backlash from small to medium enterprises (SMEs) and the agricultural sector across the country; and
WHEREAS the proposed changes create two classes of taxpayers, not achieving the proposed crackdown on tax avoidance the Government of Canada sets out to achieve; and
WHEREAS the proposed changes significantly reduce the ability to income split, which may result in higher taxes for shareholders and current income splitting practices among family members; and
WHEREAS the proposed changes to rules that prevent keeping investment income inside a corporation to take advantage of lower tax rates, in order to more easily invest and grow a healthy business; and
WHEREAS the proposed changes aim to eliminate tax plans that convert dividend income into lower-taxed capital gains;
THEREFORE, BE IT RESOLVED that the Alberta Association of Municipal Districts and Counties urge the Government of Canada not to proceed with the proposed federal tax reforms that will negatively impact small to medium enterprises and the agricultural sector.
The Government of Canada claims they are not in support of how some Canadians use corporations as a tax shelter to pay lower tax rates (compared to personal income tax rates). While the proposed tax changes are meant to affect the wealthy, they will directly impact the average small business owners, and in Brazeau County, like the rest of Alberta and Canada, small business, specifically the oil and gas sector along with agriculture, is the backbone of the economy and will be negatively impacted by the proposed changes.
RMA has no active resolutions directly related to this issue.
On December 22, 2017, the AAMDC received the following letter from Elliott Hughes, Deputy Director of Tax Policy, on behalf of Bill Morneau, federal Minister of Finance:
On behalf of the Minister of Finance, the Honourable Bill Morneau, thank you for your correspondence of November 28, 2017 regarding the Government of Canada’s proposed changes to address tax planning using private corporations.
Since the launch of public consultations on July 18, 2017, Canadians have engaged in an important discussion on proposed measures to address tax planning using private corporations. The Government has listened to and appreciates the feedback of the many Canadians who are helping to get this right. The Government is committed to addressing any unintended consequences of these measures and is focused on supporting Canada’s hard-working, middle-class small business owners, while targeting unfair advantages that largely benefit the wealthiest Canadians.
Canadians work hard and should be rewarded for that work with greater opportunities for themselves and their families. Since coming to office, the Government has taken a number of actions that demonstrate its commitment to an economy that works for the middle class and those working hard to join it. As one of its first actions, the Government raised taxes on the wealthiest one percent in order to cut taxes for the middle class, benefitting nine million Canadians. In Budget 2016, the Government replaced the previous child benefit system with the Canada Child Benefit (CCB), which is simpler, more generous, and better targeted to those who need it most.
The Fall Economic Statement, tabled on October 24, 2017, builds on this progress by proposing to:
As the economy grows, the Government will ensure that every Canadian pays their fair share, so that the benefits of that growth can be shared by more than just a wealthy few. Fairness in the tax system allows the Government to keep taxes low, while ensuring the ability to fund programs and services for all Canadians. The Government will move forward to ensure that Canada’s competitive corporate income tax rates are not being used by high-income individuals to gain a personal tax advantage through their private corporations, taking into account the feedback received from Canadians on each aspect of the consultation.
Through income sprinkling, high-income individuals can divert corporate income to family members who are subject to lower personal tax rates or who may not be taxable at all. In some cases, someone earning $300,000 with a spouse and two adult children can use a private corporation to get tax savings that amount to roughly what the average Canadian earns in a year.
Throughout the consultation period, the Government received feedback on the complexity of the proposed measures and potential unintended consequences. The Government also heard that the measures could create uncertainty in relation to how amounts received from a family business would be taxed.
Taking into account the submissions made through the consultation, the Government will move forward with simplified measures to limit income sprinkling using private corporations, while ensuring that the rules do not impact businesses to the extent that there are clear and meaningful contributions by spouses, children and other family members. The simplified income sprinkling measures aim to provide yeater certainty for family members who contribute to a family business. The revised measures are proposed to be effective for the 2018 and subsequent taxation years.
A number of stakeholders also identified potential unintended consequences associated with the proposed measures to address the multiplication of the lifetime capital gains exemption (LCGE). For example, concerns were raised about the potential impact on intergenerational transfers of family businesses. In light of these concerns, the
Government will not be moving forward with measures to limit access to the LCGE.
During the consultation period, the Government heard from business owners that the flexibility afforded from savings accumulated in the corporation is important to their success. Savings may be held within a corporation to finance an upcoming business expansion, to save for a downturn, or to provide greater flexibility to deal with personal circumstances, such as parental leave, sick days or retirement.
At the same time, holding a passive investment portfolio inside a private corporation allows the owners to take advantage of low corporate income tax rates to gain a personal wealth advantage. The low small business rate, for example, can provide an initial advantage of roughly 35 cents on each dollar of corporate income saved, compared to the same investment made outside a corporation. A significant advantage persists after the investment income is paid out of the corporation to its owners.
The Government will move forward with measures to limit tax deferral opportunities related to passive investments, with a focus on high-income individuals who benefit under the current rules from unlimited savings opportunities far beyond the pension, Registered Retirement Savings Plan and Tax-Free Savings Plan limits available to other Canadians. In further developing these measures, the Government will ensure that:
Incentives are maintained, so that Canada’s venture capital and angel investors can continue to invest in the next generation of Canadian innovation.
The Government will propose specific measures to limit tax deferral opportunities related to passive investments, and will release draft legislation as part of Budget 2018.
Conversion of Income into Capital Gains
In the consultation paper of July 18, 2017, the Government sought to strengthen the income tax rules to curb tax planning strategies involving the conversion of income into lower-taxed capital gains.
The consultation raised issues concerning unintended consequences and potential challenges for intergenerational transfers of businesses, including farms. Given these issues, the Government will not move forward with the proposed changes regarding the conversion of income into capital gains, and the draft legislative proposals released with the consultation, including the proposed effective date of July 18, 2017, will not proceed.
The Government will continue its outreach to farmers, fishers and other business owners to develop proposals to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system.
Support for Small Businesses and Entrepreneurs
The Government is committed to providing comprehensive and effective support to help businesses grow, invest and create additional good, well-paying jobs. Canada’s low corporate taxes and other supports through the tax system encourage new capital investment that make businesses more productive and competitive. Reducing the federal small business tax rate to 9 percent will allow small businesses to retain even more of their earnings to reinvest, supporting the growth of their business and job creation.
Small and medium-sized businesses in Canada also benefit from direct federal program support for scaling up, including access to financing and foreign markets, support for innovation, and services to build entrepreneurial and management capacity. This support is delivered through a number of key federal organizations including:
Most recently, the Government is advancing a number of key initiatives that are increasing the availability of financing for businesses. Budget 2017 announced the Government is making available $400 million through the BDC to increase the availability of late-stage venture capital, through a new initiative called the Venture Capital Catalyst Initiative. Budget 2017 also announced that nearly $1.4 billion in new financing would be made available through the BDC and EDC to help Canada’s clean technology businesses grow and expand. As well, Budget 2017 is making available up to $950 million for a small number of business-led innovation “superclusters,” making it easier for innovators and potential customers to work closely together on research, development and demonstration activities to boost productivity, create jobs and drive economic growth.
Going forward, the Government will ensure that corporations that contribute to job creation and economic growth continue to benefit from a supportive tax environment and other measures aimed at helping them succeed.
Thank you for writing.
The Government of Canada response indicates that several proposed tax reforms will not be implemented due to concerns expressed by RMA and other stakeholders across Canada. In particular, the response highlights the decision to not proceed with proposed measures to address the multiplication of the lifetime capital gains exemption due to the potential impacts on intergenerational transfers of family businesses, including farms.
The Government of Canada will also not implement changes related to the conversion of income into capital gains due to their potential unintended impacts on small businesses and farms. Additionally, the government of Canada plans to consult farmers, fishers, and other business owners on how to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system.
While RMA is pleased with the Government of Canada’s willingness to re-evaluate these proposed changes, it should be noted that other proposed changes, such as those to address passive investment and its use by high income individuals will persist. For example, changes to passive income requirements for small businesses that will result in the accumulation of more than $50,000 in passive income subjecting some business earnings to a higher tax rate was implemented on January 1, 2019. As resolution 15-17F is very broad in its direction that all proposed federal tax reforms not be implemented, RMA assigns this resolution a status of Accepted in Part, and appreciates the Government of Canada’s willingness to re-evaluate and not proceed on several aspects of their initial proposal.