Are Significant Tax Changes Coming for Private Companies and their Shareholders?

As you may be aware, the Trudeau Liberals campaigned with a promise to “cancel income splitting and other tax breaks and benefits for the wealthy.” The Government reaffirmed its commitment to this policy in the most recent Federal Budget, released March 22, 2017, stating it was reviewing certain tax planning strategies using private corporations.

The Liberal Federal Government has stated that it feels that private corporations are being used to provide high-income individuals with unfair tax advantages. The 2017 Budget highlighted three common tax planning strategies that have the attention of the Government:

  1. Sprinkling income using private corporations: The Government noted that private corporations are being used to sprinkle income amongst family members, shifting amounts that would otherwise be realised by an individual subject to high personal tax rates to individuals subject to lower personal tax rates.
  1. Holding passive investment portfolios inside private corporations: The Government feels that private corporations are being used to accumulate income subject to tax at lower rates and invest that income in passive investment portfolios.
  1. Converting regular income into capital gains: The Government noted that certain plans are used to convert income that is normally paid out in the form of salaries or dividends into capital gains that are subject to tax at lower rates.

The Income Tax Act (Canada) (the “Act”) already includes various measures intended to limit the scope of the benefits realized with the use of private corporations. The Canada Revenue Agency has previously provided favorable income tax rulings on various private corporation planning strategies that work within the scope of the existing legislation, including the use of certain dividend sprinkling structures.

Nonetheless, the Government has indicated that it feels additional limits are required. The Government announced that it intends to release a paper setting out its concerns in greater detail together with its proposed policy responses. These proposals may be released in the coming months. We have not yet received any indication as to the nature of these changes. We note, however, that certain changes could be easily introduced that would have a profound impact on income sprinkling.

For example, under the current legislation dividends from private corporations typically cannot be used to split income with children under the age of 18, as such payments will generally be subject to tax at the highest marginal rates (the “kiddie tax”). The Act could quite easily be amended by Parliament to extend the application of these rules to children over the age of 18 (perhaps to the age of 25) or perhaps even to an individual’s spouse.


Recommended Action

Given the Government’s past announcements on this matter, it would be prudent to review your remuneration planning for the 2017 and 2018 taxation years to maximize the benefit that may be realized from income sprinkling, as significant changes are probably coming.

As always, care should be taken to ensure that such income sprinkling complies with existing restrictions on the allocation of income to family members. Consideration should be given, for example, to:

  • Kiddie Taxes – the payment of private corporation dividends to an individual who has not reached the age of 17 in the previous tax year (i.e. in calendar year 2016 for 2017 year dividend payments) will be subject to income tax at the highest marginal rates – the “kiddie tax.”
  • Attribution – the Act includes many “attribution” rules which operate to tax in the hands of an individual certain income and capital gains of persons not dealing at arm’s length with the individual. If you are contemplating the transfer of shares, or other income-producing assets, to a related person we strongly suggest that you contact us for tax advice before implementation.
  • Expected income – as always, you should carefully consider your expected sources of income, expenses, and credits for the year when planning for your remuneration.


Please contact us if you would like to discuss your remuneration for the coming year or if you have any questions or concerns on this matter.