December 13, 2017
Federal Government Implements New Income Sprinkling Restrictions Despite Concerns from Business Community and Senate Committee
This afternoon, Federal Finance Minister Bill Morneau announced additional details on the Government's plan to restrict income sprinkling for owners of Canadian-controlled private corporations, introducing new 'tests' to exclude certain individuals.
 
While the changes represent improvements to the initial proposal, the new rules are slated to come into effect on January 1, 2018, ignoring the strong concerns expressed by CFA and a coalition of more than 70 organizations, as well as the recommendations of the Senate Standing Committee on National Finance, regarding the rapid implementation timeframe and lack of policy details provided to business owners. However, businesses will have until Dec. 31, 2018 to adjust to the changes before filing their 2018 taxes.
 
The revised measures are intended to ensure that they do not affect family members who make meaningful contributions to a family business. Specifically, these tax changes clarify the process for determining whether a family member is significantly involved in a business, and thus is excluded from potentially being taxed at the highest marginal tax rate.
 
The changes include "bright-line" tests to automatically exclude individual members of a business owner's family from the new income sprinkling restrictions who fall into any of the following categories:
  • The business owner's spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over. In recognition of the special challenges associated with planning for retirement and managing retirement income, the new approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement.
  • Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, the labour contribution requirement will be applied for the part of the year in which the business operates.
  • Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
  • Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
Finance Canada's Press Release, Technical Backgrounder, and CRA Guidance Documents can be found at the following link: http://www.fin.gc.ca/n17/17-124-eng.asp 
 
The Minister's announcement follows the release of the Senate Standing Committee on National Finance's report on the proposed tax changes. CFA appeared before the Committee and made a written submission, with our recommendations aligning with those put forward by the Senate:
  • Recommendation 1: That the Minister of Finance withdraw his proposed changes to the Income Tax Act respecting Canadian-controlled private corporations.
  • Recommendation 2: That the Government of Canada undertake an independent comprehensive review of Canada's tax system with the goal of reducing complexity, ensuring economic competitiveness, and enhancing overall fairness.
  • Recommendation 3: That, should the Minister of Finance proceed with his proposals to amend the Income Tax Act respecting Canadian-controlled private corporations, then he should delay their implementation until at least 1 January 2019, and:
    • Release, as early as possible, draft legislation and related guidance documents;
    • Undertake thorough, cross-Canada consultations with businesses, tax specialists, physicians, farmers, and other Canadians on draft legislation;
    • Undertake, and release publicly, an economic impact assessment of the proposals;
    • Conduct, and release publicly, a gender analysis of each of the proposals; and
    • Assess, in cooperation with provinces and territories, the potential impacts of the proposals on the accessibility of health care, and consider measures to avoid these consequences
CFA is disappointed that the government has disregarded the concerns of the business community and the recommendations of the Senate. We will continue to engage the Ministry of Finance on this issue and keep members up-to-date as new information becomes available.
 
If you have any questions, please contact Ryan Eickmeier, Vice President, Government Relations & Public Policy, at reickmeier@cfa.ca or phone 416-695-2896 ext. 297.

 
Canadian Franchise Association
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