Liberal tax policy Archives - Financial Independence Hub

By Trevor Parry

Special to the Financial Independence Hub

I thought it might be of use to prepare a brief review of where we stand with regards to Bill Morneau’ s infamous July 18, 2017 tax proposals.

As you are aware, attempting a profound degree of subterfuge, Mr. Morneau announced some “minor” tax changes aimed at bringing “fairness” to the taxation of Canadian Controlled Private Corporations (CCPC). What he in fact brought forward was the most fundamental change to corporate taxation since the introduction of the current Income Tax Act in 1972. This was coupled by a paltry 75-day consultation period, most of which coincided with summer vacations and harvest.

Despite his attempted strategic deception, a robust group of stakeholders representing a wide cross section of the Canadian economy mobilized to challenge these proposals and carry the message to Canadians that what was being proposed was fundamentally at odds with any rational conception of fairness, but instead a punitive attack on small business, professionals and family farms. The government was inundated with over 21,000 submissions. Last week we saw what I believe will be the first of several stages of government retreat from these proposals.

Few of the proposals will end in legislation

It is my contention that given the profound opposition that these proposals have engendered, both within the Federal Liberal caucus and from many sectors of the Canadian economy that little, if any of the proposals will actually find their way into legislation. Even the revised proposals create such layers of byzantine complexity that they are largely unworkable, elevate the roll of a CRA auditor well beyond their current capability and increase compliance costs exponentially for most Canadian economic enterprises.

If I may I would like to review the proposals and revised positions:

I) Surplus Stripping

The initial proposals called for an expansion of the ill-conceived section 84.1 of the Act. This is the infamous section that resulted in it being more advantageous from a tax perspective to sell your business to your next door neighbour rather than to your children. The proposals had called for restrictions on sale beyond simply spouse or children to include extended family members. It also placed the power of determination of defining “arm’s length” to a CRA auditor. The proposals also introduced a new omnibus anti-avoidance measure, section 246(1) that would have eliminated the ability to implement a common post mortem strategy, commonly referred to as “pipeline.” It would have made redemption strategies the only acceptable means of undertaking post mortem tax planning, threatened retroactivity and potentially exposed business owners (and their estates) to taxation rates in excess of 70%.

Mr. Morneau fully retreated from this proposal on Thursday of last week. There has been guidance provided by the Department of Finance that section 84.1 will now be substantively reformed to remove or reduce impediments to inter-family succession.

Whether this will be restricted to farm and fishing corporations, or be a general provision applying to all CCPC’s remains to be seen. I am hopeful that the Department of Finance will actually survey the tax planning community for guidance on what is prudent an efficient.

The conclusions regarding the retreat from the earlier proposals are as follows:

The cancellation of s. 246(1) restores traditional planning including “pipeline” and maintains that estate freezes are still relevant and prudent planning option.
Attacks on potential Capital Dividend Account (CDA) credits have been terminated. The use of corporately owned life insurance is still a preferred planning method.

II) Capital Gains

The proposals, both directly and through the Taxation of Split Income (TOSI) proposed a radical curtailment of the ability to claim the Lifetime Capital Gains Exemption (LCGE). The LCGE would have been restricted to individuals over the age of 18. It also would have eliminated the ability to claim the LCGE where shares are owned by a trust. This is of course a common planning technique with both tax and non-tax rationale. The ability to income split, creditor protect corporately held assets and insurance and multiply the LCGE all require a family trust as a central element of any freeze transaction or other selected reorganization strategies.

Retreat welcomed by tax planners

By Dave Faulkner, CLU, CFP

Special to the Financial Independence Hub

On July 18, 2017, the Liberal Government announced a significant set of tax proposals designed to close certain tax loopholes that can result in high-income individuals gaining tax advantages that are not available to most Canadians, these include:

The elimination of “income sprinkling” by paying dividends to family members that own shares in a business or holding company.
The curbing of “passive investment income,” by imposing additional taxes on money sitting in a corporate investment account.
The conversion of a corporation’s regular income into capital gains using legal tax strategies that have been around for decades.

In recent interviews, Finance Minister Bill Morneau said that average Canadian business owners need not worry about his proposals, because if you make less than $150,000 per year you will see no increase in taxes paid. He continues to state that he is going after only the wealthiest Canadians that use corporate tax loopholes to gain advantages over the hard-working middle class. It is important to note however, that what Bill Morneau refers to as tax loopholes are in fact legitimate tax planning strategies that have been available to all Canadians for many years.

To help sell these proposals proponents of the new tax have released simple spreadsheets illustrating the impact to an individual in Ontario earning $1.00 of business income who earns over $200,000 and pays tax at the top marginal rate of 53.53%. In other words, the wealthy 1%.

As a financial planner, I know first hand that most small business owners are not wealthy. They are hard working average Canadians who are struggling to build their business, often at the cost of not being able to make regular contributions to retirement plans. As a software designer, I know first hand that simple spreadsheets do not provide enough analysis to come to any meaningful conclusions, due to the complexity of our tax system. All they do is support the opinions of the author.

So, to help bring some meaningful analysis to the position that these proposed changes will not burden middle class business owners, Razor Logic Systems has deployed a temporary version of our financial planning software RazorPlan that addresses one aspect of these proposals, passive investment income. As the largest provider of financial planning software to independent Canadian financial advisors, upon request we will temporarily make this version available to any financial writers, bloggers, the media, and Minister Morneau.

Passive Investment Income

Currently, to eliminate double taxation, a portion of the income tax a CCPC pays on investment income is refundable. In Ontario, the combined Federal and Provincial tax rate is 50.17% made up of 19.5% non-refundable and 30.67% refundable only once the income is paid to the shareholder in the form of a dividend. This effectively ensures that the tax paid on $1.00 is the same regardless of where it originated. The tax proposal aims to eliminate the 30.67% refundable portion, claiming the low tax rate on active business income in a CCPC creates an advantage for individuals with a corporation compared to individuals who earn income personally. Continue Reading…