2017-18 Federal Budget Status Update
Since the announcement of the 2017-2018 federal budget proposal, a flood of concerns and uncertainties have been raised for Private Corporations. This has been a hot and heated topic of discussions and debates throughout Canada as the proposal goes under heavy criticism in assessing the impact, fairness, equality, and administrative effectiveness.
The implementation of this new regime on taxation of private corporations may be not within our control as corporate business owners, but KNOWLEDGE IS POWER in proactively planning for anticipated tax implications.
As the proposals are still in the consultation process, it is to be expected there will still be further amendments made prior to the finalized budget decision. And it is important to note the following proposals are highly probable, yet still lacks assurance until the process is finalized in 2018.
If you have any questions or concerns regarding how your private corporation may be affected by the following, please contact me to further schedule a consultation session. My upcoming availability can be found at https://www.kliuaccounting.com/booknow.
Intentions to Reduce Small Business Tax Rate to 10% effective January 1, 2018 & 9% effective January 1, 2019 (currently 10.5%)
Restrictions on income-splitting & dividend sprinkling
Current State: Kiddie Tax / Tax on Split Income (TOSI)
To prevent income splitting with minor children (under age 18)
Minor child pays highest personal tax rate on TOSI income and loses personal tax credits
Restrictions for 18-24 year olds, and amounts received by adult family members must be "reasonable"
What is "reasonable"?
Amounts received must be reasonable compensation for individual's contribution to the business: e.g. labour and capital contribution.
Capital gains on sales of private corporation shares to non-arm's length person may lose 50% inclusion rate
What type of income is applicable?
Capital gains on sales of private corporation shares
Taxable dividends received on private corporation shares
Income from partnership or trust
What is the purpose of this?
Eliminates existing tax planning strategies of income sprinkling among non-involved family members
What is the complication in this?
Every dividend paid to a person will be measured against the “reasonableness” standards
Complexity in tracking of contribution in business
What is reasonable? Reasonableness is not clearly identified.
Ignores family member’s contributions to the success of business e.g. stay-at-home spouse, elderly family members whom is no longer active shareholder
When can this become effective?
January 1, 2018
What does this mean?
2017 is the LAST CHANCE to sprinkle!!!
Document CONTRIBUTION in the corporation
Define interest on shareholder loan
Define loans from related parties
Holdings of corporation shares
Assess and document involvement and contribution in corporate activities: e.g. working hours, management/consultation services, board of director roles & meeting involvements, etc.