If you consider yourself to be involved in the small business sector, then you should be aware that the Department of Finance has recently proposed sweeping changes to the taxation of private corporations in Canada (July 18, 2017). A number of clients have already contacted us on how this will impact their current tax planning strategies. To keep everyone on top of things, we have simply summarized the areas that are targeted and some planning that can be done to mitigate the impact of the changes.

The three areas that are being targeted:

1. Income sprinkling
a. Income splitting among family members
b. Multiplication of the lifetime capital gains deductions (LCGE) via family trusts
2. Converting income into capital gains (surplus stripping)
3. Holding passive investments inside a private corporation

Planning that can be done to mitigate the impact of these changes:

1. Have family members become more actively involved in the business in order to get paid.
2. If family trust holds company shares that are qualified for LCGE, shares should be rolled out to the individual beneficiaries before the end of 2017
3. The Department of Finance has emphasized that any amendments to the rules governing the taxation of passive investments held in a private corporation, will not apply to existing passive investments or income earned thereon, ie, grandfathering relief will be available, and the new rules will only apply on a go-forward basis.

Changes to the taxation of private corporations in Canada