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Canadian Gov't Drops Capital Gains Tax Changes

by Mike Godfrey, Tax-News.com, Washington

20 October 2017


The Canadian Government has dropped plans to prevent the conversion of a private corporation's regular income into capital gains.

The proposal had formed one of the three key elements of the Government's intended crack down on tax planning tools used by private corporations. The Government was concerned that high-income individuals were able to avail themselves of a significantly lower tax rate on income that was converted from dividends to capital gains.

Income is normally paid out of a private corporation in the form of a salary or dividends to the principals, who are taxed at their personal tax rate (subject to a tax credit for dividends). However, only one-half of capital gains are included in income.

The Government had wanted to amend the tax rules to prevent the surplus income of a private corporation from being converted to a lower-taxed capital gain and stripped from the corporation.

However, Finance Minister Bill Morneau has now announced that the Government will not move forward with the measures.

The Finance Department said that during the consultation on the reforms, the Government had been told by business owners, including many farmers and fishers, that the changes "could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of businesses."

The Finance Department also said that the Government intends to work with family businesses, to make it easier to hand down their business to the next generation.

The decision was welcomed by the Canadian Federation of Independent Business (CFIB). President Dan Kelly said the changes would have made it costlier for small business owners to sell or transfer their business to their children.

The Government earlier this week announced changes to the passive income and income sprinkling elements of its reform package. It will not be moving ahead with a proposal to limit access to the Lifetime Capital Gains Exemption. It also said that it will cut the small business tax rate from 10.5 percent to nine percent.

Ron Bonnett, President of the Canadian Federation of Agriculture, said both the limit to the lifetime CGT exemption and the rules on conversion to capital gains "would have led to enormous complexity and added costs for inter-generational farm transfers and could've even encouraged farmers to sell their businesses to non-family members."

TAGS: individuals | capital gains tax (CGT) | Capital Gains | tax | small business | business | tax thresholds | tax planning | tax rates | Canada | dividends | tax reform | individual income tax

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