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Tax Changes For Private Corporations

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Tax Changes For Private Corporations

December 2017

Advocacy by CHBA and the Coalition before, during and after the public consultation period has led to significant adjustments to the tax changes, but not complete a reversal as a Senate Committee studying the issue has recommended.

The Standing Senate Committee on National Finance called on the federal government to shelve its entire package of small business tax changes in a sharply critical report released just hours before Finance Minister Bill Morneau confirmed details surrounding income sprinkling, which are effective January 1, 2018.

CHBA was very engaged in the Senate Committee’s review. CHBA, the Saskatoon and Region HBA, the Regina and Region HBA and CHBA-Newfoundland and Labrador all spoke before the Committee, as did the Coalition for Small Business Tax Fairness, of which CHBA is an active partner.

Here is where things stand now:

Income Sprinkling

The government has released details which it expects will clarify the process for determining whether a family member is significantly involved in a business. Individuals who do not meet any of the prescribed exclusions will be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate. The tax changes will be effective for the 2018 taxation year. Owners of private corporations will have until the end of 2018 to adjust to the new exclusion for non-service businesses.

CHBA advises that all members who may be affected by these new rules should consult with their tax advisors immediately. CHBA is working with MNP LLP to provide more details on how these changes will specifically affect residential firms. CHBA and the Coalition for Small Business Tax Fairness have been critical of both the timing of this announcement and the implementation period.

Passive Income

Details regarding new measures to address Passive Income in private corporations is expected in the 2018 Federal Budget.

Intergenerational Transfers

The Minister has said that new consultations on this issue will be launched in 2018, but no further details are currently available.


October 19, 2017 - CHBA Reaction to Small Business Tax Rate Reduction and Details on Tax Changes for Private Corporations

Following weeks of harsh criticism for its plans to change the small business corporate tax system, the government has made a number of announcements over the past few days regarding moving ahead with tax changes for private corporations.

Here’s what we've learned:

-The Small Business Tax rate will be reduced to 10% on January 1, 2018, and then fall to 9% on January 1, 2019.
-Income sprinkling restrictions will go ahead, basically as proposed, with a “simple and clear framework through the tax code” to define meaningful contributions to business forthcoming. Actual details of how this will work were not released, making assessment of the impact difficult.
-The government is introducing a $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal 5-per-cent rate of return).
-All past investments and the income earned from those investments will be protected;
-Incentives will be put in place so that venture capital and angel investors can continue to invest.
-Unlike income sprinkling, it does not appear that new rules surrounding passive income will be ready for implementation on January 1.
-The government will “step back and reconsider” its initial plans to limit the ability of business owners to convert regular income of a corporation into capital gains (which are typically taxed at a lower rate).
-This move, combined with the pull back on changes to lifetime capital gains exemption rules, means the government is completely deferring its initial plans for intergenerational transfers.

There are still numerous details to be clarified before a full analysis can be undertaken on the specific rules regarding income sprinkling and passive investments, once the government releases them.

As well, there will be new rounds of discussion and consultation on how to address what the government sees as problem issues with intergenerational transfers.

But the government is attempting to address the issues brought up by CHBA and others surrounding its initial proposals: that their scope would hurt the majority of private small-businesses; that they prevented businesses from managing risk properly; and, that they would impact the ability of residential firms to operate effectively.

CHBA will continue to work on these issues on behalf of industry.

Overall, however, it is clear that the tremendous efforts of CHBA, members, and like-minded organizations had their intended effect. A lower small business tax rate, a significantly limited scope of higher taxes on passive investments, and a complete pull back on changes to intergenerational transfers are big wins.


On July 18, 2017 Federal Finance Minister Bill Morneau announced the launch of public consultations on proposed changes affecting tax planning for private corporations. Given the potential impact of these measures on CHBA members, but actively opposed the changes as an Association and part of the Coalition for Small Business Tax Fairness.

Tax Planning Private Corporations Consultations

The government is proposing significant limits to three tax practices:

  1. Income Sprinkling – diverting income from a high-income individual to family members with lower personal tax rates, or who may not be taxable at all.
  2. Passive Investment Income – gaining a benefit by retaining passive investments in a corporation, taking advantage of the fact that corporate income tax rates are much lower than personal tax rates for higher-income individuals.
  3. Capital Gains – converting a private corporation's regular income into capital gains that provide an opportunity to reduce income taxes.

The government's consultation period ended on October 2, 2017

Industry Concerns

Given the predominance of small businesses in the residential construction industry – many of which are family-owned – CHBA is very concerned about the proposed changes.

CHBA has concluded that the tax changes the government is proposing will have significant negative impacts on Association members who operate private corporations, many of which are family-owned. These impacts will include:

  • Additional restrictions on distributing earnings to family members, either as salary or dividends.
  • Much higher taxation of capital retained and passively invested within a private corporation.
  • A number of tax barriers that will make business ownership succession within a family more difficult and expensive, and complicate retirement funding for current owners.

In contrast to a salaried employee, incorporated entrepreneurs and professionals have to provide for their own pensions and benefits, retain earnings for cash flow in slow times, and face both the myriad of risks and expenses related to running a business.

These changes have the potential to undermine entrepreneurship and business ownership that power the economy. They directly pose a disincentive to entrepreneurs to take on the risk/reward challenge that starting and owning a business.

Overall, rather than recognizing that you are a risk-taking entrepreneur, these tax changes will treat you as if you were an employee who never has to worry about making a payroll, keeping the bank happy or worrying about your accounts receivable.

CHBA Action

CHBA is vigorously opposing the tax changes the government has proposed while at the same time providing detailed information on the potential ramifications for members:

  • One of CHBA’s strategic partners, MNP (a leading accounting, tax and business consulting firm in Canada), has invited members to access its General Summary Analysis of the Proposed Changes as part of reviewing the potential impacts of the changes on your business.
  • MNP has also developed an industry-specific review of the changes in Proposed Tax Changes for Family Businesses: Your Questions Answered.
  • CHBA developed talking points for members to reach out to their MP during caucus retreats at the beginning of September and as the House resumed its Fall sitting.
  • CHBA has spoken to MPs directly on this issue and the concerns of industry.
  • On September 20, CHBA CEO Kevin Lee testified at the House of Commons Finance Committee, expressing CHBA’s concern over the proposed tax changes in his opening comments and garnering extensive discussion through the question period that followed.
  • On October 24, CHBA President Eric DenOuden testified before the Senate Standing Committee on National Finance as part of its study on the government’s proposed tax changes to private corporations. In his remarks and follow-up Q&A, Eric stressed that there were many more details to be worked out in regards to the government’s plans to move forward with income splitting and taxing passive income, and the details are what’s most critical for home builders.

CHBA Q&A During Finance Committee Meeting – Sept 20, 2017

CHBA's Remarks to Finance Committee – Sept 20, 2017

CHBA's Statement to the Senate Committee on National Finance – Oct 24, 2017
  • CHBA’s submission to the Department of Finance included results from a member survey on the impact of the changes and common scenarios and business practices within the industry that will be negatively affected.

Coalition for Small Business Tax Fairness

As an original member of the cross-sectorial Coalition for Small Business Tax Fairness, CHBA has banded together with other business and industry associations to oppose the government’s proposed tax changes.

The Coalition has also spoken before the Finance Committee and with numerous MPs and government officials on this issue, and sponsored ads in The Hill Times.