This update is intended for those seeking additional insights into the 2018 Federal Budget including its impact on both domestic and multinational enterprises.
The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada’s (the “Federal Government”) 2018 Federal Budget (“Budget 2018″) on February 27th, 2018 (“Budget Day”). Budget 2018 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”) and the Excise Tax Act (the “ETA”) while also providing updates on previously announced tax measures and policies.
Significant Budget 2018 proposals and updates include:
- Introduction of simplified measures (compared to the July 2017 proposals) applicable to passive investment income in a private corporation that will: (i) limit access to the small business rate for small businesses with significant passive savings, and (ii) limit access to refundable taxes for larger Canadian-controlled private corporations (“CCPCs”).
- Rules applicable to equity-based financial arrangements including synthetic equity arrangements and securities lending arrangements.
- Rules to prevent tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts.
- Modification of the foreign affiliate provisions so certain rules cannot be avoided through the use of “tracking arrangements”.
- Updates on Canada’s participation in the Organisation for Economic Co-operation and Development (“OECD”) project on Base Erosion and Profit Shifting (“BEPS”).
Our full analysis of selected proposals and tax measures can be found on Fasken.com.
(The full version of this bulletin was originally published on Fasken.com – “The Federal Government’s Proposals Targeting Private Corporation Tax Planning” – August 3, 2017.)
On July 18, 2017 (the “Consultation Date”), the Minister of Finance (Canada), the Honourable William Morneau, released the Government’s proposals to address tax planning commonly used by private corporations and their owners in the form of a paper (the “Consultation Paper”) and draft legislation amending the Income Tax Act (Canada) (the “Tax Act”) to implement certain of the proposed measures.
The Government addresses three broad issues in the Consultation Paper:
- sprinkling income using private corporations;
- holding a passive investment portfolio inside a private corporation; and
- converting a private corporation’s regular income into capital gains.
Selected proposals and tax measures are detailed below.
Details of the Proposed Tax Measures
The Consultation Paper notes that the Government has imposed a progressive personal income tax system with five marginal tax rates ranging between 15 percent and 33 percent that apply at different taxable income thresholds. The Government is concerned with arrangements that effectively transfer income that may otherwise be taxable in the hands of a high-income individual to a family member subject to lower tax rates resulting in lower tax receipts for the Government (“income sprinkling”).
The Tax Act currently has a number of provisions that deny or limit the potential benefits of income sprinkling, but the Government believes that additional measures are necessary with a particular focus on investments in private corporations.
Proposed Tax Measures
The measures proposed by the Government fall into three categories:
- extension of the tax on split-income (“TOSI”) provisions;
- restricting claims under the lifetime capital gains exemption (the “LCGE”); and
- new tax reporting obligations applicable to trusts and partnerships.
Continue reading to learn how the Canadian Federal Government’s announced target tax planning strategies affect private corporations.
In a summary judgment released on September 16, 2015, the Federal Court of Canada examined and disposed of the non-constitutional arguments in the Hillis and Deegan case generally finding that the automatic data collection and disclosure of taxpayer information to the United States by Canada pursuant to the Canada-U.S. Intergovernmental Agreement (IGA) is not inconsistent with the Canada – U.S. Tax Treaty (Tax Treaty) and does not otherwise violate the taxpayer confidentiality provisions in section 241 of the Income Tax Act (Canada) (ITA).
The plaintiffs had originally filed a claim seeking a declaration that the relevant provisions under the Canada – U.S. Tax Information Exchange Agreement Implementation Act (IGA Implementation Act) which implements the IGA are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights. An amended statement of claim was subsequently filed adding the non-constitutional arguments. The plaintiffs sought a permanent prohibitive injunction preventing the collection and automatic disclosure of taxpayer information to the United States by the CRA. A special sitting of the Court was scheduled so that the issues could be disposed of before taxpayer information was to be automatically sent pursuant to the IGA.
The Canadian government’s position was that the collection of taxpayer information is authorized by the IGA and that disclosure to the United States is not inconsistent with the Tax Treaty or in violation of section 241 of the ITA.
In its decision, the Federal Court endorsed the general reasoning and the legal arguments submitted by the government.