In its 2015 Economic Action Plan budget, the federal government stated, “The Lifetime Capital Gains Exemption for farm or fishing property provides an incentive to invest in the development of productive farm and fishing businesses and helps farm and fishing business owners to accumulate capital for retirement.”
Fast forward to 2017 when times have changed. In its 2017 document Tax Planning Using Corporations, the federal government is proposing to tax part of this incentive back from the family farm, the backbone of our rural communities.
A segment of the document states, “specifically, individuals would no longer qualify for the capital gains exemption in respect of capital gains that are realized or that accrue before the taxation year in which the individual attains the age of 18.” Furthermore, the document states, “the second measure would introduce a reasonableness test for determining whether the lifetime capital gains exemption applies in respect of a capital gain” and “the third measure would no longer permit individuals to claim the lifetime capital gains exemption in respect of capital gains that accrue during a period in which a trust holds the property.”
The following examples illustrate how each of these proposed changes would affect the family owners of shares of a family farm corporation or interest in a family farm partnership:
- A farmer and spouse co-own a farm through a farm partnership or corporation. On disposition of their shares or partnership interest the spouse may lose all or part of their capital gains exemption if they do not meet a reasonableness test. Whether the reasonableness test is met or not will be determined by the Canada Revenue Agency (CRA). This test is based on the amount that would have been paid to an unrelated individual considering their labour contribution, past earnings, asset contributions and business risk. To add insult to injury, any portion of the taxable gain that is not considered reasonable will be taxed at the highest PEI rate of 51.37%. It is a well-known fact that the farm spouse contributes in many ways to the family farm operation and their involvement is critical to its success. However, this contribution may not meet the reasonableness test as it cannot always be assigned a dollar value and most farms would not be tracking this information.
- Another common structure is where a family trust owns the shares of the family farm corporation. Even where the farmer is the main beneficiary of the trust, on the disposition of the shares by the family trust, capital gains exemption would no longer be allowed.
We would encourage all farmers to contact their local MP. These MPs have to stand up for the farm community who are being unfairly targeted by these proposals.
As many of you would no doubt have heard by now, a series of tax proposals has been issued by the federal government to radically change the way Canada taxes private corporations. Government has provided until October 2, 2017, a very short period of time for effected parties to provide their views on these proposals. Unfortunately, this is not a realistic time frame for proposals with such widespread implications.
What does this mean for PEI business?
While the public rhetoric has been that these proposals target the “wealthy” the reality is these proposals will have significant ramifications for ALL incorporated private businesses in Canada. As an example, our firm has prepared tax estimates for a typical business on Prince Edward Island: A business earning $100,000 per year and splitting the income with a spouse would see an increase in overall annual income tax paid of up to approximately $7,700 or about a 34% tax increase. This equates to almost $650 per month in additional income taxes! For a business on PEI making $50,000 per year and splitting the income with a spouse, the changes could result in an increase in overall annual income tax paid of up to approximately $2,700 or about a 27% tax increase. This equates to almost $225 per month in additional income taxes!
The effect of the proposed changes for a PEI corporation and its shareholders for passive income could reach an effective 74.55% tax rate. This is clearly unacceptable. We are hopeful the government would not have intended this tax result.
In addition, these changes are especially concerning for the farming and fishing sectors in particular. These industries are the backbone of the PEI economy and must be protected.
Our firm has issued a series of articles on how this may impact your business. If you have missed these please contact our offices. In addition, as a member firm of DFK Canada, MRSB has been actively analyzing the proposed legislation and working with industry groups and our fellow DFK member firms across Canada in an effort to lobby the federal government to amend or abandon these proposals.
What should you do now?
We realize that most private business owners are extremely busy trying to run their business operations and are not generally experienced or active lobbying government. However, this time is different and we strongly encourage you to speak up and make your voice heard. We have included a link to a proposed letter that you can sign and we propose you email to the following parties:
Thanks, any questions call or drop an email.
Terry G. Soloman, CPA, CA, TEP
Partner Tax Services
Direct line: (902) 629-1987
Fax: (902) 566-5633