Finance Minister Bill Morneau Clarifies Intended Scope of Proposed Tax Regime on Passive Investment Income Earned by Private Corporations

On Wednesday, October 18, 2017, Minister of Finance Bill Morneau clarified some aspects of the Department of Finance’s proposed measures to tax investment income earned by private corporations (the “Passive Income Proposal”). The Passive Income Proposal was announced in the July 18, 2017 consultation paper released by the Department of Finance (the “Consultation Paper”) which introduced sweeping changes to the taxation of private corporations and their shareholders in Canada.

The Minister clarified that:

• the new rules will not apply to existing savings and income from those savings; and
• the existing rules will apply on investment income earned from new savings up to a maximum of $50,000 of passive income in a year (equivalent to $1 million in savings, based on a nominal 5% rate of return). This will permit up to $100,000 of capital gains from new savings in a year to be taxed under existing rules. To the extent investment income from new investments exceeds $50,000 in a year, the new punitive tax rates will apply.

Additional clarifications and details in respect of other proposals contained in the Consultation Paper are expected to be announced later this week. While an expected introduction date for legislation pertaining to the Passive Income Proposal has not been announced, the government has indicated that it will move forward with measures to limit tax deferral opportunities related to passive investments. It has also indicated that it will release draft legislation as part of Budget 2018 and that any proposals will apply on a go-forward basis. The scope of any grandfathering rule also remains to be seen.

If you or your family holds income-producing assets in a Canadian corporation, we encourage you to contact a member of the Aird & Berlis Tax Group for more details.