On July 18, 2017, the Federal Government released draft legislation and proposals to amend the Income Tax Act which would significantly change how private corporations are taxed. This was done in the middle of the summer, and with no input from business owners or professionals. This represents perhaps the most significant change to how private corporations have been taxed since 1972 and will affect almost every private corporation.
A ‘private corporation’ includes every corporation that is not public so this would include your corporation. That means corporations that are owner-managed family business, small businesses (one person, or husband and wife, etc.), across every industry (farms, manufacturers, retailers, wholesalers, professionals, etc.). It also includes holding corporations (real estate, operating companies, portfolios, etc.).
The 2017 Federal Budget states that “The Government is taking action to ensure that the tax system is fair for all Canadians. The Government will continue to improve tax fairness for Canadian families by closing loopholes, eliminating measures that disproportionately favour the wealthy, and cracking down on tax evasion, so that every Canadian has a real and fair chance at success.” Clearly, the Federal Government views taxation of the private sector as ‘unfair’. The reference to ‘tax evasion’ is absurd and disingenuous.
Unfortunately, this issue has not been publicized sufficiently in the media, with a few exceptions (e.g. the OMA, talk radio). This is unfortunate, since the impact would be very broad. In my opinion, there would be significant damage to the economy. What is not mentioned by the Federal Government is the risk that business owners endure, the capital required, that for many owners the business (corporation) is the retirement plan, that there needs to be adequate incentive given the tremendous personal sacrifice made by owners
Briefly, some results of the draft legislation and proposals:
- Corporate tax rate: corporate tax may be increased to the top marginal personal tax rate (on income that is not required to operate the business), i.e. remove the deferral of tax at the lower corporate rate;
- Dividends: payment of dividends would be significantly restricted, by having to meet a new ‘reasonableness test’;
- Capital gains exemption: significant restrictions on use of the exemption;
- Capital gains: taxation of the portion that is currently tax-exempt (i.e. 50%);
- Investment income: increased tax on distribution of income to shareholders.
What to Do?
If there is any upside, it is perhaps that the draft legislation and proposals are so drastic that there will be a determined response that results in reconsideration by the Federal Government.
It is important to take prompt action. Submissions to the Federal Government must be done by October 2, 2017.
- Make a submission directly to the Federal Government. The attached template letter may be used. To make a submission, see: http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp
- Email the Department of Finance: email@example.com
- Write to your Member of Parliament. See below to find your MP’s mailing address.
- Sign a petition. One possible petition at Change.org:
- Participate in the CFIB fax campaign: http://www.cfib-fcei.ca/cfib-documents/DIN1031.pdf
- Contact the CFIB http://www.cfib-fcei.ca/english/index.html
- Contact your Chamber of Commerce or Board of Trade
Be assured that I am following this issue closely, and will update you when more is known. Ideally every corporate owner will take action by doing at least one of the above.
- Current news, articles and commentary: Google search: “private corporation tax department finance”
- MP address: https://lop.parl.ca/ParlInfo/Compilations/HouseOfCommons/MemberByPostalCode.aspx?Menu=HOC
- The relevant Department of Finance document can be found here: http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.pdf