Bill Morneau: Proposed Tax Changes
As you may be aware, Bill Morneau, the federal finance minister, made an announcement today that the federal government is proposing to make three tax changes to target what they perceive to be “loopholes” in the system. These changes would specifically target individuals that they deem high-income earners and individuals with corporations or small businesses. The announcement has to do with the discussion paper that they indicated was coming this summer when they released their federal budget back in March.
The first of the three specific changes has to do with income splitting, or “income sprinkling” described by Mr. Morneau. More specifically, the splitting of income with family members that are in lower marginal tax brackets. They are now proposing that any income splitting be subject to a “reasonableness” test, where this income would have to be deemed appropriate for the amount of work done or contributed to the company. Mr. Morneau also announced that this reasonableness test would include stronger rules for 18-24 year olds, specifically targeting the splitting of income with adult age children.
The second proposed change aims to tighten rules on retaining passive investments inside a company that are taxed at the small business rates, as opposed to higher personal tax rates. There was no reference as to what these changes may look like, but it was specifically mentioned that any changes would only be applied to future investment income, rather than retroactively.
The third and final proposal is to change the rules to limit the conversion of a corporations business income into capital gains, which currently receive preferential tax treatment, seeing as only 50% of any gain is taxable under current rules.
They have yet to release a more detailed written statement to the public or the actual discussion paper that they announced in the federal budget, but we expect further details to be released within the coming weeks. In his press briefing after the announcement, Mr. Morneau said that he expects there to be push back from the different professional associations/organizations and that the proposals are open for consultation until October.
We hope and expect that the different medical, dental, and other professional associations across the country will offer significant pushback between now and October to help prevent the government from passing these measures into law.
We will be doing some analysis with our accountants and legal teams over the next little while as more information is released, to determine if any proactive measures should be taken.
If you have any questions about what was announced today, please do not hesitate to contact our office.