Tax Alert - Proposals on Converting Income to Capital Gains Abandoned

October 2017

Dave Walsh, Partner, Tax Service Line Leader |

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On October 19 the government released further changes to their controversial July 18 proposals on private company tax planning, the third such release during Small Business Week. This announcement focused on the issue of converting income to capital gains and the tax advantages associated with this planning. The government appears to be backing down on this proposal.

Conversion of Income into Capital Gains

The government announced it will not be moving forward with measures relating to the conversion of income into capital gains. The government discovered during the consultation process that the measures proposed in July would have resulted in unintended consequences, particularly in respect of taxation upon death and intergenerational transfers of businesses. Specifically, the July proposals would have substantially increased the cost of passing on family businesses to the next generation, putting owners of such businesses in the difficult position of finding it to be more tax efficient to sell to a buyer outside the family.

The July proposals and their related consequences were discussed in our Tax Alert, A detailed review: The government’s private company consultation paper. The proposals relating to the conversion of income into capital gains (surplus stripping) were to be effective as of the July 18, 2017 announcement date. This caused considerable uncertainty for taxpayers with respect to post-mortem planning for deaths prior to that date as well as to other transactions that were already in progress. The October 19 announcement appears to have put those concerns to rest.

Another concern with the July proposals was a new anti-stripping rule that was very broadly worded and was causing considerable uncertainty in the tax community due to its vagueness. This proposal had been included in the surplus stripping proposals and therefore will not be proceeding at this time.

The government also announced that it will work with family businesses to make it more efficient to hand down their businesses to the next generation.

Summary

We are committed to keeping you updated on issues around the private corporation tax changes. Once the final legislation related to these changes is announced, we will host a webinar to outline the impact of the changes and provide planning opportunities.

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 19, 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.