Some initial thoughts on federal government tax consultation

Below is commentary from MRSB Tax Partner, Terry Soloman on some initial thoughts on the federal government's most recent tax consultation announcement.

 

On Monday, October 16, 2017, the federal government provided some initial feedback on the actions they are considering resulting from the consultation period of the July 18, 2017 tax proposals. I have had numerous clients and others from my local business community ask me for my opinion on what today’s announcements mean for them. There is not enough information to make a definitive statement yet but here is a summary of what we know (or do not know):

1)     A reinstatement of a previously announced plan to reduce the corporate tax rate on active business income, to be phased in by a one half of one percent decrease in 2018 followed by a further one percent decrease in 2019. This will reduce corporate tax rates on active income eligible for the small business deduction on PEI to 14.5% in 2018 and down to 13.5% in 2019.

While I will never complain about tax decreases on business income, wasn’t the difference between corporate rates and personal rates on business profits one of the reasons provided by government as to why the proposals issued this summer were required? All this change does is make the spread greater. However, any reduction to the corporate rate is a deferral of tax only due to Canada’s fully integrated tax system.

The reduction in the corporate tax rate on business profit does not deal with the much larger issue of applying TOSI rules to the distribution of this profit from the corporation as a dividend to family members, especially spouses, who contribute indirectly to the business success. This tax rate reduction (deferral) is minor and is really a distraction from the real issues at hand.

2)     It appears, based on today’s update, that a reasonableness test is still part of the proposals but maybe the test will be less rigorous than initially suggested. I had hoped to see spouses excluded from TOSI rules and maybe limit the TOSI to adults up to age 24. This bright line test would have eliminated the need for the ridiculous amount of red tape and uncertainly a reasonableness test will create.

3)     There were some comments that the proposals to limit the availability of the capital gains exemption have been abandoned. Does this mean TOSI will not apply to arms length capital gains? Will minors and non active adults be subject to a reasonableness test and still be restricted from claiming capital gains exemption on share sales? Will family trusts allocating capital gains still be targeted? Again, no details provided.

4)     There was complete silence with respect to any update on the taxation of passive income, which in my view is the largest issue of all, effecting both business decisions of the private sector in the short and medium term as well as creating uncertainty over retirement strategies of Canada’s business sector. The business sector deserves better and need certainty in the rules they operate under. Unfortunately there was no update on this issue or on timelines for more clarity on any matters.

Frankly, with the consultation period having been closed only 14 days ago, and in excess of 21,000 submissions provided by Canadians to the Department of Finance, it is surprising that Finance officials would even have had the time to read and properly consider the volume and quality of submissions in such a short time frame, considering some submissions exceeded 150 pages of arguments. As always, the “devil is in the details” and we have not been provided with the details. It was interesting today that Prime Minister Trudeau was intent on answering all questions from the media and for the most part was not allowing the media to directly question Minister Morneau.

The government has committed to further updates and clarifications in the coming days, which many in the tax and business community will be closely watching with interest very closely.