Proposed changes: Finance takes hard stance on passive income of private corporations

On October 18, 2017, the Department of Finance (“Finance”) provided more details on its proposals (see CBT’s summary here) to target the deferral of tax benefits of passive investments within a private corporation.   

The Government believes that, “an increasing number of Canadians – often high-income individuals – are using private corporations in ways that allow them to reduce their personal taxes.”  During the consultation period, the Government heard from business owners that the flexibility afforded from savings in a private corporation is vital to their success.  Accordingly, Finance is moving forward with measures to limit the deferral of tax benefits of passive investments within a private corporation through additional tax on passive income in excess of an annual threshold. 

Finance has determined that an annual passive income threshold of $50,000 per year in a private corporation will provide sufficient savings for business purposes (funding for contingencies and future investments) and personal savings (funding for sick leave, parental leave and retirement).

Finance confirmed that the additional taxes will apply on a go-forward basis thus ensuring future income from current passive investments is protected from additional taxes.   Finance stated that it is examining the key design aspects of passive investment rules to consider circumstances in which the new rules should not apply (for example, capital gains realized on the sale of shares of a corporation engaged in an active business and income from AgriInvest, a self-managed producer-government savings account).   

Federal Budget 2018 will include draft legislation to implement the rules, including transitional measures and when the rules are to take effect.