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Canada To Protect Tax Breaks For SME Investors

by Mike Godfrey,, Washington

24 October 2017

The Canadian Government has said that it will ensure that it maintains tax incentives for venture capital and angel investors as it moves forward with plans to crack down on tax planning strategies used by private corporations.

Following the conclusion of its controversial consultation, the Government has in the last week made a series of announcements regarding the future of its proposed overhaul of the tax planning rules. The aim of the changes is to ensure that Canadian-controlled private corporation status is not used to reduce personal income tax obligations for high-income earners.

Finance Minister Bill Morneau said that as the Government proceeds with these reforms, it will ensure that incentives are maintained for venture capital and angel investors.

He explained: "Our Government wants to encourage young firms to grow. We will ensure that people who wish to invest in innovative start-ups are encouraged to do so, and we will work with the venture capital and angel investment sectors to ensure the appropriate incentives are in place."

"Financing helps young firms create well-paying jobs in Canada, thus further strengthening the middle class."

As per the latest announcements, the Government will:

  • Reduce the small business tax rate from 10.5 percent to 10 percent from January 1, 2018, and to nine percent from January 1, 2019;
  • Crack down on so-called income sprinkling within private corporations by introducing "reasonableness tests" for adult family members, who will be asked to demonstrate their contribution to the business;
  • Introduce a passive income threshold of CAD50,000 (USD39,481) per year for future, go-forward investments in private corporations;
  • Examine the issue of passive investments used to support other active businesses, including venture capital and angel investments; and
  • Scrap plans to prevent the conversion of a private corporation's regular income into capital gains.

An estimated CAD3.2bn in venture capital was invested in 530 companies in 2016. Budget 2017 included CAD400m in new financing, to be made available through the Venture Capital Catalyst Initiative to increase the amount of venture capital available to firms.

Dan Kelly, President of the Canadian Federation of Independent Business, called on the Government to undertake a detailed impact assessment of the full package of reforms before it finalizes the proposals. "More analysis is needed to determine whether the net effect of the package of changes will be positive or negative for entrepreneurs," he said.

Kelly added that further consultation "is needed to fully understand the effect on the small business community."

TAGS: compliance | tax | investment | small business | business | tax compliance | tax incentives | corporation tax | tax thresholds | small and medium-sized enterprises (SME) | venture capital | tax planning | tax rates | Canada | tax breaks | dividends | tax reform | individual income tax

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