The time when new rules on taxation of private corporations take effect is fast approaching
2018 is just around the corner, and that means small-business owners could face new challenges resulting from proposed tax rules surrounding private corporations. Aside from watching out for revised draft legislation that incorporate the proposals, business owners with private corporations should consider taking other steps to prepare.
“[C]onsider whether it makes sense to pay additional dividends to family members [listed as shareholders] who are in lower tax brackets in 2017 … before any proposed rules could increase the tax rate on such income commencing in 2018,” said Jamie Golombek, CIBC’s Managing Director for Tax & Estate Planning, in his recent report of year-end tax tips.
He also noted that under proposed split-income rules, dividends paid on most shares received through an estate freeze would be taxed at the highest rate. Therefore, those considering an estate freeze may want to think twice before pushing through.
Another possible sticking point is the “reasonableness” test, which would weigh an adult individual’s income against their labour and capital contributions along with any previous returns and remuneration, as opposed to scenarios where an arm’s-length investment was made.
“Consider these proposed rules before setting up a new business with funding or a guarantee from a family member,” Golombek said. If interest, dividends, and capital gains earned after 2017 from shares or debt held by the family member are not deemed “reasonable,” they could be taxed at the highest rate.
Corporate law might also require that shareholders that own the same class of shares be paid the same amount of dividends; therefore, paying dividends to one shareholder could have the unintended consequence of causing another person with the same class of shares to be taxed at the highest rate. To prevent that from happening, Golombek suggested a corporate reorganization to give different share classes to different shareholders.
Addressing the proposed rules on passive income, he said that a refund offered for tax on investment income from corporations may no longer be available “unless the investments arose from capital contributions from shareholders.” He cited certain estimates that put tax rates on passive income from corporations at over 70%, and tax rates on capital gains at almost 60%. The measure will apply to investments that make more than $50,000 in annual investment income.
“RRSPs and TFSAs may offer benefits beyond those available with corporate investments,” Golombek said. “Consider withdrawing sufficient funds from your private corporation to maximize contributions to RRSPs and TFSAs. … Reasonable salaries may also be paid to family members who work in the business to allow them to make contributions to RRSPs and TFSAs.”
Related stories:
Small-business tax reduction may push another tax up
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“[C]onsider whether it makes sense to pay additional dividends to family members [listed as shareholders] who are in lower tax brackets in 2017 … before any proposed rules could increase the tax rate on such income commencing in 2018,” said Jamie Golombek, CIBC’s Managing Director for Tax & Estate Planning, in his recent report of year-end tax tips.
He also noted that under proposed split-income rules, dividends paid on most shares received through an estate freeze would be taxed at the highest rate. Therefore, those considering an estate freeze may want to think twice before pushing through.
Another possible sticking point is the “reasonableness” test, which would weigh an adult individual’s income against their labour and capital contributions along with any previous returns and remuneration, as opposed to scenarios where an arm’s-length investment was made.
“Consider these proposed rules before setting up a new business with funding or a guarantee from a family member,” Golombek said. If interest, dividends, and capital gains earned after 2017 from shares or debt held by the family member are not deemed “reasonable,” they could be taxed at the highest rate.
Corporate law might also require that shareholders that own the same class of shares be paid the same amount of dividends; therefore, paying dividends to one shareholder could have the unintended consequence of causing another person with the same class of shares to be taxed at the highest rate. To prevent that from happening, Golombek suggested a corporate reorganization to give different share classes to different shareholders.
Addressing the proposed rules on passive income, he said that a refund offered for tax on investment income from corporations may no longer be available “unless the investments arose from capital contributions from shareholders.” He cited certain estimates that put tax rates on passive income from corporations at over 70%, and tax rates on capital gains at almost 60%. The measure will apply to investments that make more than $50,000 in annual investment income.
“RRSPs and TFSAs may offer benefits beyond those available with corporate investments,” Golombek said. “Consider withdrawing sufficient funds from your private corporation to maximize contributions to RRSPs and TFSAs. … Reasonable salaries may also be paid to family members who work in the business to allow them to make contributions to RRSPs and TFSAs.”
Related stories:
Small-business tax reduction may push another tax up
Small businesses need a capital assist: IIAC head
