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Converting Regular Income to Capital Gains

The government released further changes to their controversial July 18 proposals on private company tax planning, the third such release during Small Business Week.

This announcement focused on the issue of converting income to capital gains and the tax advantages associated with this planning. 

The government appears to be backing down on this proposal.

Summary of Proposed Changes to Small Business Tax from July 18

The consultation paper was made up of 3 sections:

  1. Income Sprinkling
  2. Passive Investment Income Held by Small Business Corporations
  3. Converting Regular Income to Capital Gains

Not Moving Forward with Measures Relating to Conversion of Income into Capital Gains

The government discovered during the consultation process that the measures proposed in July would have resulted in unintended consequences, particularly in respect of taxation upon death and intergenerational transfers of businesses.

Specifically, the July proposals would have substantially increased the cost of passing on family businesses to the next generation making it more tax efficient to sell to a buyer outside the family.

The proposals relating to the conversion of income into capital gains (surplus stripping) were to be effective as of the July 18, 2017 announcement date.

This caused considerable uncertainty for taxpayers with respect to post-mortem planning for deaths prior to that date as well as to other transactions that were already in progress.

The government is no longer moving forward with these specific changes.

Another concern with the July proposals was a new anti-stripping rule [Section 84.1 and new draft legislation Section 246.1] that was very broadly worded and was causing considerable uncertainty due to its vagueness. This proposal had been included in the surplus stripping proposals and therefore will not be proceeding at this time.

The government also announced that it will work with family businesses to make it more efficient to hand down their businesses to the next generation.

It appears that we had a complete 100% reversal to the legislation proposed under the third topic [Converting regular income to capital gains] in the consultation paper. 

We are committed to keeping you updated on issues around the private corporation tax changes.

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