Blog: Further Changes to the Tax Proposals

October 18th, 2017 Canada passive income

On October 18, 2017, Finance Minister, Bill Morneau, provided some clarity to the proposed changes to the rules concerning passive income earned in a corporation.  The Minister expressed that these new developments were the result of the feedback the government received from Canadians to the originally proposed tax changes released mid-July.

The Department of Finance estimates that there is currently between $200 and $300 billion dollars in passive assets being held in private corporations, which represent funds that have not been reinvested in respective active businesses carried on by these private corporations. Furthermore, it is estimated that these assets are generating approximately $20 billion annually in passive investment income. Morneau stated that the wealthiest benefit the most from the current regime, namely that 80 per cent of these passive investments are held in the top 2 per cent of private corporations.

The clarifications announced include:

  • Ensuring that existing investments in a corporation and any passive income earned from them in the future will be protected from the new tax measures.
  • Providing a threshold for passive investment income earned of $50,000 per year with respect to prospective investments, with any amount in excess of the threshold being taxed at a higher rate. The $50,000 is equivalent to a 5 per cent rate of return on $1 million of investments.
  • Maintaining incentives so that Canada’s venture capital and angel investors can continue to invest in innovation.

Similar to the announcement earlier this week, no draft legislation or substantial details were released. The government will release draft legislation for these measures as part of the federal Budget 2018.

Although the announced clarifications are a marginal improvement from the alternatives outlined in the July consultation paper in connection with passive income earned in private corporations, it will likely require that private corporations track and possibly segregate their investments into separate pools or accounts, leading to additional compliance and complexity.

We will keep you updated on any further details that may be forthcoming.

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This article was prepared by Crowe Soberman’s Tax Group. If you have any questions relating to this article, we encourage you to contact one of them.

Aaron Schechter, CPA, CA, TEP
Adam Scherer, BA, CPA, CA
Alexandra (Ali) Spinner, BA, MMPA, CPA, CA, TEP
Karen Slezak, BBA, CPA, CA, CFP, TEP
Karyn Lipman, BComm, CPA, CA
Silvia Jacinto, BComm, MTax

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.

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