Corporate Tax Changes Update

Since the federal government released its July 2017 discussion paper on changes to corporate taxation, much has happened. The chamber network across Canada spoke up and made its concerns known. Among other things, your chamber sent a letter to Minister of Finance Bill Morneau, hosted a luncheon to educate business owners on the impacts of the proposed changes, and hosted two roundtables so that your MPs Paul Lefebvre and Marc Serré could hear your concerns.

In October 2017 and December 2017, the Minister of Finance outlined a number of revisions to the proposed corporate tax changes, including cancelling some of those proposals wholesale, and cutting the small business tax rate. These revisions are the result of strong pressure put on the government by the chamber network, among others, and MPs Lefebvre and Serré voicing these concerns in Ottawa.

We are encouraged by the revisions made so far, but we still have a number of concerns. We believe that the changes are being made too quickly and that there needs to be a comprehensive review of the tax code before amendments of this nature are approved.

Keep reading for a brief summary of the current status of the corporate tax changes as well as links to backgrounders provided by the government.

Small Business Tax Rate Reduction

The federal government intends to reduce the small business tax rate from 10.5% to 9.0% (10.0% effective January 1, 2018 and 9.0% effective January 1, 2019). This was part of the 2015 Liberal campaign platform, but had been put on hold indefinitely in Budget 2016. Read more about this change here.

Lifetime Capital Gains Exemption

Minister of Finance Bill Morneau announced in October 2017 that the federal government would not move forward with measures that would limit access to the LCGE. The government indicated this change was a result of consultations with Canadians and concerns about unintended consequences. Read more about the context of this decision here.

Income Splitting

In December 2017, the federal government announced simplified measures to restrict income splitting. The government says that it will introduce reasonable tests for family members aged 18-24 and those aged 25 or older. The government says that family members will need to demonstrate their contributions based on the four following principles:

  • labour contributions;
  • capital or equity contributions to the business case;
  • taken on financial risks of the business (e.g. co-signing a loan); and/or
  • past contributions of labour, capital, or assumed risk.

The government also announced a number of ‘bright-line tests’ that would automatically exclude an individual from being taxed at the highest marginal tax rate. Read the government’s income sprinkling backgrounder here, and learn more about the ‘bright-line tests’ here.

NOTE: These changes came into effect January 1, 2018.

Investment Income

The government has acknowledged the importance of the flexibility afforded by savings accumulated within a corporation. At the same time, it argues that this flexibility should not allow “unlimited tax assisted savings over and above the RRSP and TFSA limits”. The government is going to move forward with measures to limit tax deferral benefits, but it has stated that it will, among other things:

  • ensure investments already made by private corporations’ owners (including future income earned) are protected; and
  • include a passive income threshold of $50,000 per year for future investments (income below this threshold will see no tax increase).

Read more about changes to corporate investment income here.

The government also wishes to highlight its support for entrepreneursventure capital and angel investment, and farm families.

Your Chamber’s Response

Many of these changes are welcome and evidence of the hard advocacy work of the chamber network. We applaud MPs Lefebvre and Serré for meeting with the chamber stakeholders and bringing the concerns of our business community to Ottawa. Nevertheless, there are still some challenges. The reduction of the small business tax rate and the cancellation of any reforms to the LCGE are encouraging. We remain concerned, however, about the changes to income splitting and corporate investment income. Tax experts still have a number of unanswered questions about these changes and what they mean.

In addition, it is our contention that changes to the tax code of this nature should take place within the context of a thorough, comprehensive review, such as a royal commission. The Senate Committee on National Finance proposed this same recommendation in its December 13, 2017 report, Fair, Simple and Competitive Taxation.

You can read the Canadian Chamber of Commerce’s most recent response to federal corporate tax changes here. You can also read the Senate Committee’s report here.