On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies.
This was no surprise-the Minister had hinted at this some months ago at a tax conference.
In a nutshell, the Minister, and his many left-leaning compadres in the Liberal government, don’t like the fact that generally well-to-do taxpayers have been using creative tax planning to mitigate the effects of Canada’s generally high personal tax rates. Such planning helps to reduce the real personal tax rate, which in Ontario can be as high as 53.5% thanks again to Trudeau, to a somewhat less confiscatory level.
Much of this planning is tied into the use of private corporations.
That is not nice, they say, because the average Joe Blow cannot avail him or herself of such tricks because they don’t have a private corporation to use.
There are three types of planning that are the focus of this document:
Income Spitting-they really hate this, and are going to KO it mainly by extending the “kiddie tax” concept to folks of all ages. In addition, they are going to cut the tap, mercifully with some grandfathering for pre-2018 gains, on the multiplication of the “capital gains exemption” (“CGE”) within the family. Forget about giving any to those lazy kids! If you go through these mind-boggling provision, you are going to need either some Tylenol, or something stronger that goes in a glass. I predict it is going to be weeks before tax pros begin to fully appreciate the implications.
Capital gains strips-Under the current system, it is possible to extract corporate surplus at capital gain rates (or equivalent). There are two main approaches that can be used:
- “Crystallizing” a capital gain within the corporation and utilizing the resulting “capital dividend account” (“CDA”) to make much of the distribution tax-free, and
- “Bumping-up” the adjusted cost base (“ACB”) of shares sold between family members, and using that increased ACB to create a tax-free “pipeline” to remove surplus. As long as the selling shareholder did not use the CGE, section 84.1 of the Income Tax Act (“the Act”) did not apply to treat the payments as deemed dividends.
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The document proposes to put an end to such fun and games. In case of the former, kiss the CDA goodbye; in the case of the latter, welcome to the new expanded section 84.1
Earning Passive Income on Corporate Tax Deferral–Private corporations have billions of dollars in retained earnings that result from active business income taxed at relatively low corporate tax rates.
The humorless mandarins at Finance don’t like the fact that, what they view as largely deferred taxes, is earning passive investment income for the benefit of the company and its shareholders, and not them
They are not even sure about what to do about this, they just know that they don’t like it!
They have even resorted to looking at an approach that was added to the Act in 1972, I believe as Part V tax, to deal with “non-qualified investments”-that was repealed a few years later.
Believe me, they will do something, and it will not involve giving medals to corporation who benefit from such planning.
But I am not here to write about any of the above in great depth. What I am here to focus on are the international tax aspects of the proposals.
What international tax aspects? There is nothing about that in Bill Morneau’s document.
However, they are there, but under the surface, and neither he nor the Prime Minister would ever want to acknowledge it.
Namely, with proposals like those, which will substantially remove the ability of high-income Canadians to soften the tax rates they pay, many such taxpayers will head for the nearest exit and do whatever they can to become non-residents. Remember, unlike the situations with our brethren to the South, Canadian citizens can completely say “bye bye” to Canadian taxes by becoming nonresidents. Remember the line in the 1976 film Network, “I am mad as hell and I can’t take it anymore!”. I also submit that, with the world of the internet and the “cloud”, it is easier and more feasible for Canadians to follow that path, even if they maintain business interests in Canada.
Furthermore, if Finance does bad things to corporate surplus invested in passive assets, corporations may well be inclined to shift their business offshore, unless Finance closes that too!
But, you won’t catch me complaining about any of this! After all, I specialize in helping Canadians individuals become non-resident-I even wrote a book about it! I also help Canadian companies to shift business offshore. Thanks so much Bill and Justin!
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
