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July has been a good month for sunny patios and meeting tax deadlines! Trowbridge is looking forward to the month of August, as many of our team members take well-deserved vacation time. 

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Our London office will be closed for a bank holiday on August 28th. 

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Top 10 Q&As on the Proposal for Tax Planning Using Private Corporations

By Peter Megoudis,  Director   

The past few days, we have been inundated with questions from clients, colleagues, and peers about the Department of Finance's Discussion Document on "Tax Planning Using Private Corporations", issued on July 18, 2017.

We thought we would share some of those questions with you, as well as provide our provisional answers, based on the discussion of the proposals in the Document.

This is basically our Top Ten list:

Q1: Does this mean that I will no longer be able to pay dividends out of my holding company to my four kids at university or my spouse?
A1: You can, but if the amounts are not "reasonable", given their equity or labor contribution to the company, they will be subject to tax at the top "split income" rates (the "kiddie tax" - which is not just for kiddies anymore).

Q2: Does this affect the salaries I pay my 15 and 13 year olds for their services to the corporation.
A2: No, the new rules do not impact wages.  As always, though, wages will need to be "reasonable" to be deductible by the corporation.

Q3: I am thinking of selling my company in a few years, as will the family trust that received the common shares following an estate freeze 10 years ago.  Does this mean the 25 family members who are beneficiaries of the trust cannot claim their respective capital gains exemption on the capital gain allocated to them by the trust?
A3: That is correct. For dispositions after 2017, gains accrued within a trust will no longer be eligible for the [roughly $800k] capital gains exemption.  
However, an election can be filed in 2018 to have a deemed disposition of the shares, the gain from which would be eligible for the capital gains exemption (if otherwise qualified).

Q4: Wow, I am glad I did not set up a trust to hold the common shares.  My kids hold their shares directly.  At least they will be able to claim the capital gains exemption, right?
A4: Not quite.  Subject to the special 2018 deemed disposition election:   Gains realized or accrued by minor children will no longer be eligible for the exemption, even for arm's length sales.   Further, gains realized or accrued by other family members will only be eligible to the extent the gain is not itself subject to the split income tax (ie the extent to which it is "reasonable" given their respective contributions to the company).

Q5: That is a shame.   I am sure that will make my US fellow shareholders happy though, as they were always complaining that their children still had to pay US capital gains tax on their gains, even if the Canadian tax was subject to the exemption.  That will now put everyone on a more equal footing.
A5: Yes, and it makes it less likely that trusts will be used to hold shares for family members.   This will reduce the risk of having those nasty US "accumulation distribution" rules applying to US beneficiaries.

Q6:  What do you mean minor children can no longer claim the capital gains exemption?   In a couple of years, my 16 year old son is planning to sell to an arm's length third party the shares of his IT startup that he worked on all by himself (wouldn't even let me help him - not sure what it is about, some app to allow 2 year olds to communicate through social media).  You mean to tell me he won't be able to claim the capital gains exemption, even if all the gain is 100% related to his work?
A6:  That is correct.  The definition of "split income" is extended to cover gains on arm's length sales, and there is no "reasonableness" test for minor children.

Q7:  The doctor who works in the clinic down the street tells me I can no longer earn investment income through my medical services corporation.  Is he smoking something?
A7: He may or may not be smoking something, but he is partly right.  The proposals seek to impose an extra non-refundable corporate tax on investment income earned from funds derived by active business income that was subject to the lower tax rates for business income.
Further, gains realized by the corporation on business derived assets may no longer be eligible for the capital dividend account.
In this way, the former advantage of using a business corporation to grow investment funds at a higher pace than funds held personally will no longer apply.

Q8:  My "friend" holds his investments through a BVI company.  He ends up paying lower corporate rates on his investment income - as the company is not what they call a CCPC, apparently it does not pay a refundable tax on the income.   Is that affected by the proposals?
A8: Maybe, we don't know for sure.   The Minister is playing coy with us and hinting that they may be looking at non-CCPC companies, but we have to wait and see.

Q9:  My other friend holds both his business and his investments through a Nova Scotia Unlimited Liability Corporation (ULC).  As he is a US citizen, he says it has helped him claim a foreign tax credit in the US for the Canadian corporate taxes, but he still has some extra US taxes to pay as the Canadian corporate rates are lower than the US personal tax rates.   How will this change?
A9: Well some good news here on the US front.  As the Canadian corporate rates may now be higher, he may be able to now claim a full FTC in the US, and thus no longer have to pay regular US tax.

Q10:  Boy, I am depressed.   Any good news?
A10:  Well, the Document did say that they will be keeping the capital gains inclusion rate to 50% (there were rumours that they might be increasing it).  Also, at this stage these are just proposals, and the Finance Minister has opened the floor for comments.

Curious to see what happens...

Important Upcoming Dates:

October 16, 2017
- US tax return filing due date for extended returns (US)

October 16, 2017
- Foreign Bank Account Reporting (FBAR) filing due date for extended FinCEN Form 114 (US)

Changes to Canada Revenue Agency (CRA) Website

The Canada Revenue Agency, or Agence du revenu du Canada,

has changed its main website  address.

The official Agency site is now a part of the federal government domain, at: 

The previous CRA website address will automatically redirect to this new site location, however the re-direct is said to be temporary so it would be best to update all shortcuts or bookmarks you have previously set to the CRA site.

Courtesy of Kirill Chistyakov, Expatriate Tax


Toronto  -  London, UK  -  Vancouver 

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