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Feds 'retreat' on passive investment taxation changes for Canadian-controlled private corporations

Budget highlights also include funding for federal courts
|Written By Jennifer Brown
Feds 'retreat' on passive investment taxation changes for Canadian-controlled private corporations
Kim Moody of Moodys Gartner Tax Law LLP says the government deserves credit for listening to the concerns of the business community. However, a new rule will further restrict access to the small business deduction.

The federal government has backed away from its July 17, 2017 proposal on how the taxation of passive investment income for Canadian-controlled private corporations would be taxed.

Kim Moody, director of the Canadian tax advisory with Moodys Gartner Tax Law LLP in Calgary, says the punitive tax rates/regime proposed that would have impacted lawyers have been “fully eliminated” with the integration principle being maintained. 

"Today's budget appears to be a full-scale retreat by the government. Instead of following its approach as laid out in the July 18, 2017 and October 18, 2017 releases, the budget will instead propose two new measures to limit deferral 'advantages' from holding passive assets in a CCPC.

"Instead, the government proposes to further restrict access to the small business deduction if the passive income of the corporation exceeds $50,000. 

“They completely backed down on the passive investment proposals, with the exception of a proposal that will reduce access to the small business deduction to the extent that your passive income exceeds $50,000 and it’s a $5 reduction of the small business deduction for every $1 of excess passive income,” says Moody.

Further technical amendments are being proposed to refine how a corporation will receive refunds on the taxation of its investment income. 

“Tax practitioners and private business owners have been very concerned that the implementation of this flawed policy would dramatically impact CCPCs’ (and their shareholders) ability to accumulate assets for a variety of reasons. In addition, valid concerns were raised as to why public corporations and non-residents would not be subject to such a harmful new regime,” Moody says.

Overall, Moody says, the proposals are welcome. 

"Any lawyers that have professional corporations this will definitely impact them," says Moody.

"Accordingly, the government deserves credit for listening to the concerns of the business community. However, this new rule will further restrict access to the SBD [small business deduction]. Along with the 2016 SBD amendments that significantly restricted access (along with mind-numbing complexity), we are now left with a SBD that is very difficult to access and compute. As we have written about before, it is likely time for the SBD to be eliminated from the Act. However, the politics behind such an elimination likely make this not possible in the short term."

Last fall, the Canadian Bar Association weighed in on the issue when it joined with other small business groups in protesting the federal government's planned changes to the private incorporation rules. The changes included addressing passive income by removing the tax advantage for using a private corporation for investment purposes and clamping down on transforming dividend income into capital gains, which are more lightly taxed.

Funding for courts

The budget also provides for $41.9 million over five years to “ensure that Canada’s federal courts, including the Tax Court of Canada, receive adequate support.”

“While our firm are not costing experts, it appears to us that this amount of financial injection is very low. Our tax court system — and court system in general — are clogged with cases often taking years to settle. Our firm listened to the pleas of the Chief Justice of the Tax Court of Canada at the November 2017 Canadian Tax Foundation National Conference in Toronto for funding so as to hire more personnel and improve technology. It is very disappointing to see the Chief Justice’s pleas not being acted upon,” says Moody.

Litigator Pooja Mihailovich, a partner in the tax practice at Osler Hoskin & Harcourt LLP, says the federal government has been "bolstering the capabilities of the CRA to raise more assessments, but without commensurately equipping the Court to handle more disputes."

"The Tax Court has for many years held the enviable position of being a court that resolves disputes in a timely way. The Court manages its docket strictly and makes efforts to ensure that matters are brought to a conclusion as efficiently as possible," Mihailovich said in an emailed comment.

"However, disputes are getting bigger, and there are more of them with each passing year. Trials that extend for several weeks at a time are now the norm. The Chief Justice has publicly acknowledged that the Court has been feeling the weight of this pressure for some time. This extra funding is critical, and more may be necessary, but it is about time that the Court was given its due. It is in everyone’s interest that the Court be better positioned in the current environment."

Note: More budget updates to follow here on Legal Feeds and in Law Times.




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