10/23/17 THE POTENTIAL IMPACT OF THE JULY 18, 2017 PROPOSED TAX CHANGES. Prepared for: 2017 CPA FORUM NORTH

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1 THE POTENTIAL IMPACT OF THE JULY 18, 2017 PROPOSED TAX CHANGES Prepared for: 2017 CPA FORUM NORTH Jasper October 23, 2017 K. John Fuller, CPA, CA Jason Pisesky Page 2 Page 3 1

2 OVERVIEW OF PROPOSED AMENDMENTS Ø In the 2017 Federal Budget, the Department of Finance raised concerns over the use of private corporations to reduce or avoid income tax Ø Key areas of concern identified were: income splitting Surplus stripping using capital gains (withdrawn!) passive investment income Page 4 OVERVIEW OF PROPOSED AMENDMENTS Ø On July 18, 2017, the Department of Finance released legislative proposals Ø Drafting legislation for: Income splitting Surplus stripping using capital gains Ø No draft legislation yet for: Passive investment income Page 5 OVERVIEW OF PROPOSED AMENDMENTS Ø Income splitting effective January 1, 2018 Ø Surplus stripping using capital gains effective July 18, 2017 (retroactive!) (withdrawn) Ø Passive investment income effective date likely not until 2019 Page 6 2

3 OVERVIEW OF PROPOSED AMENDMENTS ØThese are complex rules, and we recognize it will mean a big change for some ØThe Government has considered whether the actions proposed in this paper will be impacting men and women differently Page 7 INCOME SPLITTING Page 8 SUMMARY Ø Perceived mischief: Paying dividends to related shareholders who are not active in the business (dividend sprinkling) Capital gains deduction ( CGD ) claimed by shareholders who are not active in the business (withdrawn) Page 9 3

4 SUMMARY Ø Tax on Split Income ( TOSI ) aka kiddie tax Section Split income taxed at highest marginal tax rates Ø Proposed changes: Sprinkling income to family members may be subject to TOSI Capital gains may no longer be eligible for the CGD (withdrawn) and may be subject to TOSI (probably withdrawn) Page 10 CURRENT RULES Ø Only applies to individuals under 18 years old Ø If it applies tax paid at highest marginal rate on split income Ø Ceases to apply in the calendar year in which the individual turns 18 years old Page 11 CURRENT RULES Ø Split income is excluded from Part I income by way of an offsetting deduction para. 20(1)(ww) Ø Amount is added to tax payable equal to the amount of the split income at the highest marginal income tax rate Page 12 4

5 CURRENT RULES Ø For dividends: Tax is calculated based on the taxable amount of the dividend (grossed up amount), dividend tax credit applies Ø For non-arm s length capital gains: Recharacterized as non-eligible dividend income (equal to twice the taxable capital gain) Ø No personal tax credits to offset TOSI Page 13 PROPOSED RULES Ø Applies to individuals over 17 years old Special restrictions for adults ages 18 to 24 Ø Sale to non-arm s length party non-eligible dividend equal to the capital gain, subject to tax at top marginal rate Ø Sale to arm s length party taxable capital gain, subject to tax at top marginal rate (probably withdrawn) Ø Capital gains deduction restrictions (withdrawn) Page 14 PROPOSED RULES Ø Where references are to an individual who is under 18, should be read as an individual who has not attained the age of 17 before the beginning of the year (i.e. generally an individual who will turn 18 in the relevant calendar year) Page 15 5

6 TAX ON SPLIT INCOME Page 16 INCOME SPLITTING AGENDA 1. TOSI Rule Changes 2. Capital Gains Deduction Changes (withdrawn) Page 17 STEPS TO DETERMINE IF TOSI APPLIES 1. Is the individual a SPECIFIED INDIVIDUAL? Ø If not, TOSI rules do not apply Ø Need to consider related individuals, connected individuals, specified shareholders, other 2. Determine if income could be included in the definition of SPLIT INCOME Ø Amounts included in split income DO NOT include excluded amounts Page 18 6

7 STEPS TO DETERMINE IF TOSI APPLIES 3. Determine if some or all of the split income is an EXCLUDED AMOUNT Ø Excluded amounts are not subject to TOSI 4. Determine if an exception to the SPLIT PORTION definition is available Ø Reasonableness tests (restrictions for 18-24) Ø Compound income included in split portion (if individual is <25) Page 19 STEPS TO DETERMINE IF TOSI APPLIES 1. Specified Individual 2. Split Income 3. Excluded Amount 4. Split Portion Page SPECIFIED INDIVIDUAL ØStarting point everyone is a Specified Individual ØLikely more efficient to identify instances when an individual is NOT a Specified Individual Page 21 7

8 1. SPECIFIED INDIVIDUAL 3 Part Test A. The individual is resident in Canada B. The individual is related to another individual (the related individual ) who is resident in Canada Related persons expanded to include uncles, aunts, nieces, nephews Page SPECIFIED INDIVIDUAL C. The individual s income includes income from a business carried on by a corporation (partnership or trust) of which the related individual is either: a) A specified shareholder b) A connected individual Page SPECIFIED INDIVIDUAL Specified Shareholder (ss. 248(1)) Ø Taxpayer who owns 10% or more of the issued shares of any class of shares of a corporation Ø The taxpayer is deemed to own each share that is owned by a person with whom the taxpayer does not deal at arm s length Page 24 8

9 1. SPECIFIED INDIVIDUAL Connected Individual (ss (1)) a) An individual who controls, directly or indirectly, the corporation b) An individual who is part of a related group that, directly or indirectly, controls the corporation Page SPECIFIED INDIVIDUAL Connected Individual c) An individual who owns shares of the corporation having 10% or more of the total FMV of the issued shares of the corporation d) The corporation s business revenue is primarily (>50%) attributable to services performed by the individual Page SPECIFIED INDIVIDUAL Connected Individual e) The individual performs all or part (i.e. not required to be primarily ) of the services of a business of the corporation, and the individual is required to licenced by an organization (e.g. PCs) Page 27 9

10 1. SPECIFIED INDIVIDUAL Connected Individual f) An individual who transferred or lent property to the corporation having 10% or more of the total FMV at that time of the corporation s property, and any part of the consideration (shares or debt) received by the individual is still outstanding Page SPECIFIED INDIVIDUAL Ø Default: individual is a Specified Individual Ø Reminder: Uncles, aunts, nieces and nephews are related for purposes of TOSI Ø Easier to provide examples of when an individual is NOT a Specified Individual Page 29 E.G. (1) NOT A SPECIFIED INDIVIDUAL Ø A is the only shareholder Ø No other related parties are involved in any manner (e.g. loans, services, etc.) A 100 A C/S OPCO Page 30 10

11 E.G. (2) NOT A SPECIFIED INDIVIDUAL Ø A and B are not related Ø A and B can be involved in the business of Opco Ø No related parties of A or B are involved with Opco in any manner A B 50 A C/S 50 A C/S OPCO Page 31 E.G. (3) NOT A SPECIFIED INDIVIDUAL Ø A and B are related Ø Neither A nor B (nor any other person related to A or B) is involved in any other manner with Opco (e.g. silent investors) Ø A, B and C must have the same class of shares A B C 5 A C/S 4 A C/S 91 A C/S OPCO Page 32 STEPS TO DETERMINE IF TOSI APPLIES 1. Specified Individual 2. Split Income 3. Excluded Amount 4. Split Portion Page 33 11

12 2. SPLIT INCOME Current Rules a) Dividends from private corporations b) Income from partnerships c) Income from trusts d) Taxable capital gains from disposition of shares to NAL persons Page SPLIT INCOME Proposed Rules a) Same as current rules, but now also potentially applies to individuals >17 b) Interest from debt to NAL entities c) Section 15 and 246 benefits d) For persons <24 at the commencement of the year, income generated from the reinvestment of split income Page 35 WHAT IS NOT SPLIT INCOME? a) Employment income But deductibility by the corporation subject to reasonableness restriction b) Interest on personal loans a) At prescribed int rates for b) At market int rates for everyone else Page 36 12

13 STEPS TO DETERMINE IF TOSI APPLIES 1. Specified Individual 2. Split Income 3. Excluded Amount 4. Split Portion Page EXCLUDED PORTION a) For individuals <25, income and gains from property inherited by the individual from: i. A parent of the individual ii. Anyone, if the individual is either a full time student or enrolled in a post-secondary institution or eligible for the disability tax credit Ø Receipt of property through a testamentary trust may qualify Page EXCLUDED PORTION b) Individual will be deemed to have made the same contributions to the corporation (for determination of Split Portion) as the deceased individual Reasonableness test can be satisfied by the deceased individual Ø Receipt of property through a testamentary trust may qualify Page 39 13

14 STEPS TO DETERMINE IF TOSI APPLIES 1. Specified Individual 2. Split Income 3. Excluded Amount 4. Split Portion Page SPLIT PORTION Ø Generally, the split portion definition is intended to include amounts received by a specified individual which are not commensurate with the amounts that the individual would receive if they were dealing with the payor of the amounts at arm s length Page SPLIT PORTION Ø It is intended that property income received by individuals from a family business be included in split income where the income they earn is not commensurate with their contributions to the business Page 42 14

15 4. SPLIT PORTION Ø An amount will be included in split portion to the extent that it is reasonable to conclude that the amount received exceeds a reasonable, arm s length return on the property Page SPLIT PORTION Ø That portion of split income that is subject to TOSI rules for individuals >17 ØPortion that passes a reasonability test is excluded from the amount of Split Portion Page SPLIT PORTION Ø Reasonability test in regards to the source business is based on a (cumulative?) global review of: Functions performed (e.g. labour) Contribution of assets Risks assumed (e.g. personal guarantees) Total amounts paid in the year Page 45 15

16 4. SPLIT PORTION Ø More stringent reasonability test if <25: Functions performed for business only relevant if individual engaged in business on a regular, continual and substantial basis Return on capital and risks assumed amounts cannot exceed prescribed rate (currently 1%) Page SPLIT PORTION Ø For purposes of the reasonableness test, the functions performed factor is not considered if: principal purpose of the entity is to derive income from property, or 50% or more of the entity s income is property income or taxable capital gains Page SPLIT PORTION Ø For purposes of the reasonableness test, the contribution of assets factor is not considered if the income at issue is derived from: an asset that was derived, directly or indirectly, from split income, or a related person provides a guarantee or any form of financial assistance Page 48 16

17 SPLIT PORTION OF SPLIT INCOME (IS SUBJECT TO TOSI) For age 18+ individuals For age 17 and younger Split portion of split income à subject to TOSI Split Income* Excluded portion of split income is not subject to TOSI Split Income à all Split Income is caught except reasonable salaries, wages and Pubco dividends and gains on Pubco shares. * Reasonable dividends are not split income but reinvested split income is different for the age group. Page 49 PLANNING OPPORTUNITIES Ø Max out dividends in 2017 to non-active shareholders, in particular year olds Ø Do not repay shareholder loans to year olds and pay interest at 1% Ø Have related party shareholders become active in the business yr olds must be active on a regular, continuous and substantial basis Ø Pay wages, not dividends, in particular for individuals under 24 Page 50 QUESTIONS Ø Risks assumed by individual? Ø Preferred shares currently issued? Ø Same class of shares? Ø What to do with current trusts? Ø Do trusts still have a use? Ø Impact on the family business? Ø Impact on women? Page 51 17

18 CAPITAL GAINS DEDUCTION RESTRICTIONS Page 52 NO CHANGES! Page 53 SUMMARY Ø New rules Ø Changes effective January 1, 2018 Ø Prior to 2018, ability to claim the capital gains deduction ( CGD ) remains unchanged (i.e. the pre-july 18, 2017 rules still apply) Page 54 18

19 SUMMARY Ø CGD will no longer be available for: Gains accrued or realized while <18 Gains included in Split Income Gains accrued while held by a trust Page 55 SUMMARY ØGains accrued while held by a trust whether gains realized by the trust or after property has been rolled out of the trust Exception for alter ego trust, joint spousal trust, employee share trust Page 56 CGD RESTRICTIONS Ø After 2018, taxable CGD reduced by: 100% of capital gain if <18 Gains accrued while <18 Gains included in Split Income Gains accrued while held by a trust Other Page 57 19

20 CGD RESTRICTIONS Ø Drafting errors? The taxable capital gain (i.e. 50% of the capital gain) is reduced by 100% of the capital gain Where the capital gain is in excess of the CGD maximum, the CGD otherwise available could be reduced to nil Page 58 CGD RESTRICTIONS Ø Drafting errors? E.g. taxable capital gain is $1M ($2M capital gain) and $500K of the taxable capital gain is from gains accrued while individual was <18, the available CGD (max $418K) is reduced by $500K resulting in nil CGD available. Page 59 TRANSITIONAL RULES Ø In 2018, Individuals and trusts can elect to deem a disposition of eligible property, subject to old rules Ø In 2018, Individuals <18 can claim CGD if non-arm s length sale, subject to old rules Page 60 20

21 TRANSITIONAL RULES 1. Definitions 2. Conditions required for the election 3. Effect of the election 4. Filing requirements 5. Excess elections 6. Disposition by minors Page DEFINITIONS Ø Eligible Taxpayer An individual, or A trust that is a personal trust (family trust) Ø Eligible Property Property owned continuously from 2017 until election day in 2018 selected QFP or QSBC with 24 mos read as 12 mos Page CONDITIONS FOR ELECTION Ø Taxpayer is an Eligible Taxpayer owning Eligible Property and elects under ss (18.1) Ø Election cannot be used by: If <18 years old A trust if any part of the gain is allocated to a beneficiary who is <18 Page 63 21

22 3. EFFECT OF ELECTION Ø Deemed to have disposed of property for proceeds equal to greater of: Designated amount, and ACB of the property Ø Deemed to have reacquired property at the lesser of: Designated amount, and FMV (subject to over elected grind amount) Page EFFECT OF ELECTION Ø Old TOSI rules apply Ø If election made by a trust, trust is deemed to be an eligible trust Ø Can elect on a portion of the FMV Page EFFECT OF ELECTION Ø For trusts: Need to only allocate the taxable portion of capital gain Must still be paid or payable ØConsider electing on preferred shares to isolate the ACB Page 66 22

23 4. FILING REQUIREMENTS Ø Prescribed form Ø Filed on or before balance due date Ø Declare disposition day and include description of property Ø If made by a trust, info of each beneficiary involved Page FILING REQUIREMENTS Ø Election may be revoked, late filed or amended before 2021 Ø If election was made by a trust, jointly made with each beneficiary Ø Penalty for late filed or amended $1,393 per month (for $835,716 CGD) $1,667 per month (for $1,000,000 CGD) Page EXCESS ELECTIONS Ø If designated amount < FMV of property POD will be the designated amount Ø IF designated amount is more than 110% of FMV: Cost of the property is reduced by excess over 110% of FMV Election cannot be revoked Page 69 23

24 6. DISPOSITION BY MINORS Ø Old TOSI rules apply if in 2018: Individual <18 disposes of a share A trust disposes of a share and allocates the gain to a beneficiary <18 Page 70 SUMMARY Ø Individuals 17 and under have now lost access to CGD. Ø Individuals most impacted group Subject to split income treatment on reinvested split income Return on capital capped at 1% to be reasonable Must (essentially) be involved in the business full time in order to use the reasonability test in their favour Page 71 SUMMARY Ø Individuals >24, reasonability test will be important If all family members >24 are fully involved in the business, then the new TOSI rules should not apply Page 72 24

25 PLANNING CONSIDERATIONS Ø Use of family trusts will generally not be as advantageous for income tax purposes after 2017, but still may provide compelling nontax benefits (tax deferral, creditor protection, probate) Ø Pay dividends in 2017 as new TOSI rules do not apply until 2018 Page 73 PLANNING CONSIDERATIONS Ø Ensure family members have separate classes of shares to allow dividends to be paid to family members who would not be caught by the new TOSI rules Page 74 PLANNING CONSIDERATIONS Ø Purify corporations before the end of 2017 if the 50% active business asset test is not met so that the shares will qualify as QSBC shares Ø Plan to file the election in 2018 to use the CGD, or consider crystalizing CGD in 2017 by way of a share exchange Page 75 25

26 QUESTIONS / PLANNING Ø Gift of shares that are subject to 69(1)? Ø Caution regarding 69(11) Ø Consider share exchange in 2017 if unsure of FMV? Ø Complete sale of shares owned by trust with beneficiaries <18 before 2019 Page 76 SUMMARY TOSI RULES Ø Individuals >24, reasonability test will be important If all family members >24 are fully involved in the business, then the new TOSI rules should not apply (Changes to simplify the reasonability test are expected) Page 77 PLANNING CONSIDERATIONS Ø Use of family trusts should still be advantageous for income splitting, use of the CGD, tax deferral, and asset protection Ø Pay dividends in 2017 as new TOSI rules do not apply until 2018 Page 78 26

27 PLANNING CONSIDERATIONS Ø Ensure family members have separate classes of shares to allow dividends to be paid to family members who would not be caught by the new TOSI rules Page 79 GOVERNMENT QUOTES Ø Oct 16, 2017 Vast majority of CCPCs are not implicated 3% of CCPCs benefit from sprinkling Family businesses will be unaffected if the spouse or adult children are meaningfully contributing to the business Page 80 GOVERNMENT QUOTES Ø Oct 16, 2017 The Government will simplify the proposed measures The Government will work to reduce the compliance burden with respect to establishing the contributions of family members and address double taxation concerns Page 81 27

28 GOVERNMENT QUOTES Ø Oct 16, 2017 By insisting on greater tax fairness, the Government can lower the federal small business tax rate to 9 per cent from 11 per cent in 2015 (10.5 per cent today, 10 per cent effective January 1, 2018 and 9 per cent January 1, 2019), knowing that the support we provide for Canada s small businesses including the lowest small business tax rate in the G7 will help create more jobs and grow the economy Page 82 QUESTIONS? Page 83 CONVERSION OF INCOME INTO CAPITAL GAINS Page 84 28

29 NO CHANGES! Page 85 SECTION 84.1 (Personal Capital Gains Surplus Stripping) Page 86 FORMER SECTION 84.1 Ø Where: An individual sells shares of a corporation to a NAL corporation, The corporation is connected to the NAL corporation after the sale, and The hard consideration received from the NAL corporation is in excess of the hard ACB of the shares sold, the capital gain realized by the individual is converted to a dividend Page 87 29

30 FORMER SECTION 84.1 Ø Former s prevented the individual, or someone dealing on a NAL with the individual, from using their CGD to increase the ACB of the shares sold, known as soft ACB Page 88 EXAMPLE - FORMER SECTION 84.1 Ø Mr. X sells his shares of Xco to Yco for $100,000 cash. Mr. X Mrs. X FMV = $100,000 ACB = $100,000 PUC = $ % XCo YCo Page 89 EXAMPLE - FORMER SECTION 84.1 Ø Ø If ACB of XCo shares was hard, Mr. X can convert his hard ACB into cash without any additional tax consequences (ignoring subsection 84(2)); If ACB was soft (i.e. assume $99,900 of previous gain sheltered using Mr. X s CGD). Mr. X would be deemed to have received a $99,900 dividend. Mr. X $100,000 Cash Mrs. X 100% YCo FMV = $100,000 ACB = $100,000 PUC = $100 XCo Page 90 30

31 FORMER SECTION 84.1 Ø Section 84.1 converts a capital gain to a taxable dividend where an individual sells shares of a corporation to a non-arm s length ( NAL ) corporation for non-share consideration in excess of hard ACB soft ACB being ACB on the share disposed of that was created using the CGD of the taxpayer or an NAL individual to the taxpayer Page 91 FORMER SECTION 84.1 Ø The overall effect was that non-share consideration up to hard ACB could be extracted as cash tax free from a NAL corporation Ø ACB is hard for testamentary pipelines Ø ACB is hard where capital gain is taxed i.e. not using the CGD Page 92 PROPOSED SECTION 84.1 Ø ANY ACB attributable to a gain realized by a NAL individual after 1984 with respect to a share of a private corporation will be soft Regardless of whether the CGD was claimed ACB on a share created by any disposition (NAL or otherwise) by NAL individual will be soft Deemed disposition capital gains that are taxable is now soft (i.e. testamentary trusts) Page 93 31

32 POTENTIAL EFFECT Ø ALL PIPELINES ARE DEAD! Testamentary Inter vivos Ø DOUBLE TAXATION RISK! 164(6) loss carry-back Sales to individuals, then to holdco Page 94 POTENTIAL CHALLENGES Ø Need to review transactions back to 1984 Ø Need to ensure minute books updated May be difficult to catch all substituted shares Watch out for stock dividends ss. 248(5) Page 95 POTENTIAL CHALLENGES Ø Reliance on information from others? Willingness of NAL persons to share information? Or willing, but not able? Page 96 32

33 PROPOSED SECTION SUMMARY Ø For the purposes of section 84.1: When a share is acquired by an individual, ANY capital gains realized by a NAL individual after 1984 on a previous disposition of the share or a substituted share will be soft ACB. c Page 97 SECTION (Corporate Capital Gain Surplus Stripping) Page 98 NO CHANGES! Page 99 33

34 DRAFT LEGISLATION Ø Mischief: Using corporate capital gains integrated tax rate (up to 26% in AB) to distribute assets out of a corporation c Page 100 DRAFT LEGISLATION Ø Subsection applies when: Amount is received (directly or indirectly in any manner whatever) by an individual resident in Canada on or after July 18, 2017, from a non-arm s length person; The amount is received as part of a transaction or series where there is: A Disposition of property; or An increase or decrease in the c PUC of the shares of a corporation; and One of the purposes of the transaction or series was to effect a significant reduction or disappearance of assets of a private corporation such that tax payable under the Act by the individual is avoided. Page 101 DRAFT LEGISLATION Ø Subsection applies when: An amount is received by a NAL person There was a disposition of property, and One of the purposes was to distribute assets c of a private corporation without paying a taxable dividend Page

35 CONSEQUENCES Ø Where applies: The amount received or receivable by the individual is deemed to be a taxable dividend AND the corporation s capital dividend account c ( CDA ) is reduced immediately prior to that time by an amount equal to any CDA addition resulting from transactions occurring as part of the series Page 103 POTENTIAL INTERPRETATION Ø Wording has a potential broad interpretation Any proceeds received from a corporation by an individual on the sale of an asset to the corporation could become a taxable dividend Any payout of a capital c dividend account could become a taxable dividend (i.e. no more CDA) Any repayment of a shareholder loan could become a taxable dividend Page 104 POTENTIAL IMPLICATIONS Ø Potentially defeats the following plans: Implementing capital gains strips through the intentional triggering of subsection 55(2) Extracting corporate surplus (using the CGD) through the sale of qualified farm property to a c corporation Page

36 POTENTIAL IMPLICATIONS Ø Potentially defeats the following plans: NAL transactions in which capital gains are realized but sheltered with non-capital losses such that CDA is generated without tax payable Incorporation of farm partnerships c However, based on the wording of the proposed legislation, it may still be possible in certain instances to incorporate a farming partnership in a manner that does not offend section Page 106 SECTION SUMMARY Ø Necessary to scrutinize transactions involving the disposition of property to NAL persons (and payment of capital dividends thereafter) Ø Delay implementing transactions that could result in the application c of section legislation is overbroad, and is likely to be redrafted to narrow its scope Page 107 GOVERNMENT QUOTES Ø Oct 19, 2017 The Government will not be moving forward with measures relating to the conversion of income into capital gains Page

37 PASSIVE INCOME Page 109 SUMMARY Ø Finance expressed concerns over active businesses carried on through private corporations where income is taxed at SBD rates (12% to 14% depending on province), and after-tax earnings are re-invested in passive assets Page 110 SUMMARY Ø Result is that owners of corporation realize a significant tax deferral (and greater potential for asset accumulation) that is not available to individuals who invest after-tax income i.e. re-investing $0.52 for every dollar earned personally vs. private corporations re-investing $ $0.875 for every dollar earned Page

38 SUMMARY Ø No draft legislation has yet been released to address this concern likely in Budget 2018 Ø Finance has released a high-level proposal for how this matter could be dealt with Ø Combined personal and corporate tax rate on this income could be over 70%. Page 112 IMPLICATIONS Ø Private corporations would no longer be subject to refundable tax Ø Investment income would be subject to a combined non-refundable tax of at rate of 50.67% (based on current rates in AB) Ø Taxation of dividends paid out to individuals depends on which of three tax pools it is paid from Page 113 IMPLICATIONS Ø Possible Options Apportionment Method Elective Method Page

39 APPORTIONMENT METHOD Ø Tracks the source of capital used to acquire the investment in 3 different pools Pool 1 Shareholder Contributions Pool Pool 2 General Rate Pool Pool 3 Small Business Pool Page 115 APPORTIONMENT METHOD Ø Pool 1 Shareholder Contributions Pool PUC and shareholder loans Tax free distributions Ø Pool 2 General Rate Pool After-tax business income subject to general rate Distributions paid out of this pool taxed as eligible dividends Ø Pool 3 Small Business Pool After-tax business income subject to small business rate Distributions paid out of this pool taxed as non-eligible dividends Page 116 APPORTIONMENT METHOD Ø When passive income is earned, after-tax income allocated to particular pool based on relative balances at the end of preceding taxation year Page

40 ELECTIVE METHOD Ø Alternative to apportionment method simpler, but underlying assumptions likely unworkable in practice Ø No Shareholders Contribution Pool Page 118 ELECTIVE METHOD Ø If corporation elects, business income taxed at general rate all dividends paid to shareholders are eligible dividends Ø Absent election, all dividends paid to shareholders are assumed to be from income subject to small business rate all dividends are non-eligible dividends Page 119 OTHER CONSIDERATIONS Ø Under either method, non-taxable portion of gains only added to CDA if gain from disposition of shares of a subsidiary corporation exclusively engaged in active business to an arm s length person Sale of business assets to arm s length person? Page

41 OTHER CONSIDERATIONS Ø If all or substantially all of corporation s income is from passive assets can elect for current refundable tax regime to apply Page 121 PLANNING CONSIDERATIONS Ø FOR NOW WAIT AND SEE Ø If rules enacted as proposed, likely to be grandfathering provisions for existing investments Consider accelerating income realization and invest in passive assets in 2017 or 2018 to maximize deferral benefit? Page 122 GOVERNMENT QUOTES Ø Oct 18, 2017 Ensuring that investments already made by private corporations owners, including the future income earned from such investments, are protected The measures will only apply on a goforward basis Page

42 GOVERNMENT QUOTES Ø Oct 18, 2017 Protecting the ability of businesses to save the funds they need for contingencies or future investments, such as the purchase of equipment, hiring and training of staff or business expansion Page 124 GOVERNMENT QUOTES Ø Oct 18, 2017 Passive income threshold of $50,000 (2018 Budget) per year for future, go-forward investments (equivalent to $1 million in savings based on a nominal 5 per cent rate of return) to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick leave, parental leave, or retirement There will be no tax increase on investment income below the $50,000 threshold Page 125 THE POTENTIAL IMPACT OF THE JULY 18, 2017 PROPOSED TAX CHANGES Prepared for: 2017 CPA FORUM NORTH Jasper October 23, 2017 K. John Fuller, CPA, CA Jason Pisesky 42