Trevor Parry’s Open Letter on Liberal Tax Reform retreat

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:

  1. The cancellation of s. 246(1) restores traditional planning including “pipeline” and maintains that estate freezes are still relevant and prudent planning option.
  2. 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

The complete retreat from this position, as Mr. Morneau announced the withdrawal of this proposal on Wednesday in a GTA pizza restaurant is welcomed by the tax planning community.

The immediate conclusions that one can draw from this policy proposals withdrawal are as follows:

  1. Estate freezes utilizing a family trust are still prudent, acceptable and prudent planning strategies.
  2. There is some confusion remaining as the TOSI rule proposals have not been withdrawn as of yet.  The TOSI rules propose that anyone who has a portion determined as a “split share”, that is derived from split income that is now governed by TOSI would jeopardize their ability to claim some or all of the LCGE.  The business owner/shareholder would arguably have to provide a detailed disclosure on all past income paid by the corporation showing what income is and is not subject to TOSI.  The initial determination of compliant income will be left to the subjective analysis of a CRA auditor.  Therefore potentially the LCGE could still be impaired or eliminated for family members.  This should not restrict planning implementation as it is reasonable to assume that the proposals are simply too complex to implement, that further resistance will be encountered (most notably from incorporated physicians) or that the Courts will provide final clarity.

III) Taxation of Split Income (TOSI)

These ludicrous proposals wish to restrict the ability for a corporation to pay dividends to shareholders on the basis of employment or capital contribution to the aforementioned company.  Flying in the face of accepted jurisprudence from the Supreme Court of Canada in Neuman v. MNR {1998} 1 SCR 770 the Department of Finance wishes to expand the restrictions commonly known as “klddie tax” rules to require a shareholder to justify, again determined by the subjective analysis of a CRA auditor, if the individual would be a prescribed individual subject to the TOSI rules, and hence subject to taxation at the highest marginal rate.  The rules determining application of TOSI are based on employment (or past employment), risk assumed, or capital contribution to the company.

Mr. Morneau at this point is saying that the TOSI rules will be implemented effective January 1, 2018 and will be formally introduced in the next Federal Budget.

TOSI would be a compliance nightmare

The immediate conclusions are as follows:

  1. TOSI is a compliance nightmare that will require collection of past employment income data, and determination of how much is a “split share” governed by the new rules.
  2. TOSI could potentially affect the ability of a shareholder to claim the LCGE.
  3. Maximum dividend sprinkling should be undertaken in 2018.

IV) Passive Income

Perhaps the central pillar and most contentious one at that has been the ludicrous attack on “passive income” earned in a corporation.  The central tenant of this proposal is that corporate tax rates and personal tax rates create an ability to defer tax on profits which can be in turn invested by a corporation.  They strategically omit mention of integration, which is fully enforced with the actual result favouring income rather than corporate deferral and dividends.  In other words, integration results in the government getting every penny of tax owed, but leaves the triggering date of that taxable event to the shareholder/corporation. The Department of Finance would simply like to have “their” money now rather than at the discretion of the shareholder.  This is indicative of a government with a voracious spending problem rather than a revenue generation problem.

The initial proposals did not introduce draft legislation as that which accompanied the other proposals. Rather, possible remedies were suggested including cancelation of Refundable Dividend Tax on Hand, restriction on Capital Dividends or perhaps a refundable anti-deferral tax on corporate profits.

Needless to say stakeholders were livid at these proposals.  The simple hypocrisy of Department of Finance officials with massive pension assets earmarked for their retirement under the leadership of a Finance Minister who represents the absolute highest strata of Canadian wealth is profound.  Surplus savings, defined as “passive income” (again that initial determination to be made by the subjective analysis of a CRA auditor) is used by business owners to fund downturns in cash flow, finance retirement and invest in start-up enterprises.

Mr. Morneau has announced a revision of the proposals, again not accompanied by any draft legislation.  He now suggests that a corporation (or corporate group where companies are related) would be allowed to retain up to $50,000 per year as a passive asset.  This safe harbour provision is based notionally on a 5% return on $1 million of profits.  Anything in excess of the safe harbour provision would be taxed at an accelerated corporate rate, perhaps 70%.  Also, the initial $50,000 would still be taxed a very high corporate tax rates on passive income.

These proposals are of course unworkable.  It would require the business owner to maintain three “pools” governing retained earnings, grandfathered investments/retrained earnings, safe harbour assets and “passive assets”.  This would be under the supervision of our ubiquitous CRA auditor.  The company must then contend with the already problematic rules on inter-corporate dividends set out in s. 55(2).  So  in addition to tracking three separate pools the company will have to determine “safe income” from which dividends can be paid to the holding company without triggering punitive tax consequences.


I believe that this proposal will also perish upon the rocks of reality, but were it to be implemented the conclusions would be as follows:

  1. Compliance and accounting costs will profoundly, if not exponentially increase.
  2. Life Insurance has never been mentioned in the first round of or the revised proposals.  We must assume that the intention of the Department of Finance is to leave this asset alone. Given the implementation of the new “exempt” test we must believe that the Department is currently satisfied with the state of tax policy as it relates to insurance.  If that is the case the obvious and immediate remedy is to purchase larger life insurance policies with significant cash value (likely utilizing allowable overfunding and Additional Deposit Options).  This would be coupled with creation of specific lending facility to access the policy where needed to accommodate cyclical cash flow.  Finance is however aware of the positive attributes of life insurance and could always move to limit its use, or curtail lending arrangements not prudently structured.
  3. Expanded use of living benefits strategies, notably actuarially valued shared ownership Critical Illness makes tremendous sense.  CI is prepayment of a benefit based on a tangible risk. The careful structuring of this policy results in a very positive tax outcome.
  4. Individual Pension Plans (IPPs) and Retirement Compensation Arrangements (RCAs) are more relevant from a pure tax planning perspective than ever before. They always made good planning sense but now represent the ability to create substantial and bona fide deductions to the corporation not trapped by the new “passive asset” tests.  If certain provinces, such as Ontario were to adopt a more laissez-faire approach to regulating IPPs, as is the case in Quebec and Alberta, there would be a widespread acceptance of this enhanced retirement structure.

I hope this overview is of some use to you.  You may certainly share this with who you wish.  I am available to discuss this letter with you or others as needed.


Trev, Oct. 24, 2017


Trevor Parry, M.A. LL.B LL.M (Tax) CLU TEP, is the President of the TRP Strategy Group, specializing in owner manager tax and compensation planning, executive compensation, philanthropic strategies, enhanced retirement planning and professional corporation planning.  Trevor was formerly the National Sales Director of GBL, a boutique actuarial consulting firm.  In addition to his practice he speaks and writes extensively on financial strategy, planning and tax issues.  

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