Tax Alert - The Government responds with significant changes from Private Company Consultation

October 2017

Dave Walsh, Partner, Tax Service Line Leader |

NTL_Firm_Tax-Alert_16Oct17_Website-Image-Assets_Small-Business_LandingPage_679x220.jpg

Canadians spoke and the government listened.  Following three months of scrutiny and criticism from small business owners, farmers, doctors, other professionals and the overall Canadian tax community, the government has revisited the private company proposals originally released on July 18, 2017 and announced significant changes. The changes announced on October 16, 2017 were in response to the unprecedented number of submissions the government received on the proposals during the consultation period which ended October 2, 2017. The government received over 21,000 submissions and BDO Canada actively participated in this process - you can read our submission to the Department of Finance here .

We have prepared a summary of the October 16th announcement.

Small Business Tax Rate to Be Reduced

As part of the response to the feedback on the consultation paper, the government announced that it will reduce the small business tax rate from 10.5 percent to 9 percent. This change will come with an initial reduction to 10 percent effective January 1, 2018 and a further reduction to 9 percent effective January 1, 2019. This rate applies to the first $500,000 of active business income earned by a Canadian controlled private corporation.

Income Splitting

A key component of the private company proposals are changes to the tax laws to limit opportunities for income sprinkling using private corporations. The government is of the view that only a small percentage of family businesses use income sprinkling techniques to reduce taxes and that income sprinkling is overwhelmingly used by wealthier taxpayers, rather than middle class taxpayers.

In the news release of October 16, 2017, the government announced its intention to proceed with measures to limit income sprinkling using private corporations, with some simplification of the July proposals. These proposals will be effective on January 1, 2018.

Also announced on October 16 was a promise that the proposed income sprinkling rules will not impact businesses to the extent there are clear and meaningful contributions by spouses, children and other family members.  The government announced that they will introduce reasonableness tests for adult family members aged 18-24 and for those 25 and older.  These adults will be asked to demonstrate their contribution to the business based on four basic principles:

  • Labour contributions;
  • Capital or equity contributions to the business;
  • Sharing the financial risks of the business, such as co-signing a loan or other debt; and/or
  • Past contributions in respect to previous labour, capital or risks.

The original proposals announced in July also contained reasonableness tests for measuring the contributions of family members using the same basic principles as outlined above. The government has not released draft legislation to coincide with the October 16 announcement but Morneau did indicate during the press release that they “will issue simplified proposals for income splitting with those who do not work in the business”. It will be particularly important to see the draft legislation in order to determine the extent of the simplification of these proposals.

It is expected that draft legislation to support these proposals will be released when the government provides their Fall Economic Statement, anticipated in November.

Lifetime Capital Gains Exemption

In what could be viewed as a surprising move, the government stated that it will not proceed with the proposals to address the multiplication of the Lifetime Capital Gains Exemption (LCGE) which were announced in July. Significant concerns were raised in the business community surrounding intergenerational transfers of businesses due to the proposed changes announced in July. We will need to wait until further details are released by the government to fully understand how relief from the LCGE proposals will help the transfer of family businesses to the next generation.

More Announcements Coming

The government also indicated that more changes to the proposals would be forthcoming. In particular, the government noted the following:

  • There are other unintended tax consequences which could impair estate planning and intergenerational transfers of farms and family businesses as a result of the proposed measures on the conversion of income to capital gains.
  • There are situations where passive investments inside of a private corporation are used by business owners, particularly small and medium-sized businesses, to manage personal income risk in the case of a downturn, sick leave, or maternity or parental leave. In addition, there are many cases where passive investments are used as a retirement tool for small business owners as other savings vehicles such as RRSPs are not sufficiently flexible and adaptable to address business volatility.

The government indicated that it is committed to addressing unintended consequences, while targeting unfair advantages that largely benefit the wealthiest of Canadians.

View all of BDO's related content in our Private Corporation Tax Changes Round-up resource.

BDO Can Help

Please contact one of our trusted Tax advisors at BDO Canada to gain more information on the July proposals and the October revisions and to help you with your private company tax planning.

Dave Walsh
Partner, Tax Service Line Leader

Rachel Gervais
Partner, GTA Group Tax Service Line Leader

Peter Routly
Partner, Central Group Tax Service Line Leader

Daryl Maduke
Partner, West Group Tax Service Line Leader

Shelley Smith
Partner, East Group Tax Service Line Leader

Learn more about BDO's Canadian Tax Services today.


The information in this publication is current as of October 16, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.