Proposed Tax Changes: Act Now

This message is further to our Tax News Flash released on July 18, 2017, in response to the Department of Finance’s legislative proposals to significantly alter the taxation of private corporations in Canada. If you or any of your family members own shares in a private corporation, you may be affected by these changes.

Of particular concern are the proposed restrictions on both the ability to claim the lifetime capital gains exemption (“LCGE”) on the sale of shares of a private corporation and the ability to income split by way of dividends received on shares of a private corporation. The rules with respect to the LCGE and income splitting are intended to come into effect on January 1, 2018.

As of January 1, 2018, capital gains realized on the sale of shares of a qualifying private corporation will no longer be eligible for the LCGE if any one of a number of restrictions apply. For example, individuals will no longer be able to claim the LCGE on shares if dividends from those shares would be taxed as “split income.” Very generally, a dividend is considered to be split income if the person who received the dividend receives an “unreasonable” return on the shares in a year taking into account the contributions of labour and capital made by the person to the corporation and the amounts otherwise payable to the person by the corporation in the particular year. These measures will significantly curtail the use of the LCGE by shareholders of a private corporation.

The draft legislation provides for a transitional election that will allow certain taxpayers to claim the LCGE on shares of a qualifying private corporation in 2018. To be eligible for this election, taxpayers must satisfy a number of conditions before December 31, 2017 that relate to the nature of the assets held by the corporation. Certain steps may be required to remove passive assets from a corporation which would otherwise disqualify the shares of the corporation for the LCGE. These steps to remove such ineligible assets must be taken no later than December 31, 2017.

Time is short. If you or your family members own shares in a private corporation, we urge you to contact a member of the Aird & Berlis Tax Group as soon as possible to determine what steps, if any, need to be taken before January 1, 2018, to minimize the impact of the proposed rules on you and your family.