Update on Tax Proposal – October 19, 2017

Further to our earlier news releases this week, Federal Finance Minister Bill Morneau announced today that the Government will not be moving forward with measures relating to the conversion of income into capital gains. This significant reversal of what the federal government had proposed is very good news and eliminates what could have been significant taxes on death and potentially on intergenerational transfers of businesses.

Under the proposed tax changes released on July 18, 2017, a non-arm’s length sale of shares to a family member for a gain of $1 million could have resulted in additional income taxes of about $185,400 when compared to the same sale had it been sold to an arm’s length party. This additional tax would have created unintended bias towards selling your business to an arm’s length purchaser.

We are glad that the Government had carefully thought about the potential implications in arriving at their decision.  The consultation period which ended October 2, 2017, resulted in the federal government receiving over 21,000 written submissions and a lot of pressure from many groups and individuals.

It is interesting to note that the Government’s reasoning for its decision was to avoid the unintended consequences in respect of taxation upon “death” and “intergenerational transfers of businesses”. Although it appears that the Government is shutting down this particular proposal entirely at this time, we will continue to monitor for any updates on anti-stripping rules that may not relate to these situations. We may expect this area of planning to be revisited in the future and may be reintroduced as part of the 2018 budget.

The Government indicated they will continue to look at developing new proposals to better accommodate intergenerational transfers of business while protecting the tax system. For more details of the press release, visit http://www.fin.gc.ca/n17/17-100-eng.asp and http://www.fin.gc.ca/n17/data/17-100_1-eng.asp .

We will keep you updated as more information is made available.