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Tax Planning For Private Corporations

On July 18, 2017 Federal Finance Minister Bill Morneau announced the launch of public consultations on proposed changes affecting tax planning for private corporations. CHBA will actively participate in these consultations given the potential impact of these measures on CHBA members.

In particular, the government is targeting what it describes as “strategies of high-income individuals involving private corporations to gain unfair tax advantages.” Most notably, the government is proposing significant limits to three tax practices:

1. Income Sprinkling – diverting income from a high-income individual to family members with lower personal tax rates, or who may not be taxable at all.

2. Passive Investment Income – gaining a benefit by retaining passive investments in a corporation, taking advantage of the fact that corporate income tax rates are much lower than personal tax rates for higher-income individuals.

3. Capital Gains – converting a private corporation's regular income into capital gains that provide an opportunity to reduce income taxes.

The government has provided a consultation paper on these issues, and has set a deadline October 2, 2017, for comments.

Industry Concerns

Given the predominance of small businesses in the residential construction industry – many of which are family-owned – CHBA is very concerned about the proposed changes.

In contrast to a salaried employee, incorporated entrepreneurs and professionals have to provide for their own pensions and benefits, retain earnings for cash flow in slow times, and face both the myriad of risks and expenses related to running a business.

These changes have the potential to undermine entrepreneurship and business ownership that power the economy. They directly pose a disincentive to entrepreneurs to take on the risk/reward challenge that starting and owning a business.

The proposed tax changes may also prevent small business owners from legitimately sharing income with family members who work in the business.

According to KPMG, the proposed changes “will impact almost every private corporation that has had the opportunity to take excess profits and invest them in areas other than their active business."

Finally, certain currently-legal tax measures may be retroactively disallowed to the July 18th date, placing small business owners at additional financial risk. Members are urged to consult with their accountants on any current practices which they may be punished for down if these changes are brought into effect.

CHBA Action

CHBA is reviewing the proposed changes with tax and business-planning experts and will be actively engaged in the consultation process to express industry concerns.

The Association is also working with its government-relations partner Earnscliffe to pull together some other like-minded associations to assess avenues of collaboration.

One of CHBA’s strategic partners, MNP (a leading accounting, tax and business consulting firm in Canada), has invited members to access its Summary Analysis of the Proposed Changes as part of reviewing the potential impacts of the changes on your business. CHBA is also working with MNP on industry-specific issues coming out of the proposed changes.

CHBA is also welcoming member insights and comments for its submission on this issue, which can be sent to: burggraaf@chba.ca.

To read a detailed review by BDO Canada LLP click here