Major Tax Changes to Private Corporation Taxation
On July 18, the federal Finance Minister released his promised consultation paper on the taxation of private corporations. The paper includes draft legislation, most of which will be effective at the start of 2018 but some of which is effective as of announcement date — July 18, 2017.
The immediate measures seem to prevent the use of pipeline planning to prevent double taxation of the value inherent in private corporation shares held on death. Double taxation of this value can arise if the estate withdraws funds from the corporation to pay the capital gains tax triggered by the death of the shareholder. While it will still be possible to avoid double taxation, the new rules seem to require use of the technique of triggering a capital loss by redeeming the shares held by the deceased in order to trigger a capital loss that can be applied to offset the capital gain triggered by the death. While this avoids the double taxation, it results in taxation of the date-of-death value as a deemed dividend (at a higher tax rate) rather than as a capital gain. The carry-back technique is also subject to strict time limits (so that the ability to avoid the double taxation can be lost if one does not act promptly).
It will take some time to work through the implications of the various immediate and proposed changes. These provisions fundamentally alter long-standing estate planning techniques.
The release is characterized as a consultation paper, but is a consultation paper that includes changes that are effective immediately (assuming that the enabling legislation is passed into law by the current federal parliament). One can expect that the government will receive lots of comments on the package before the comment deadline expires on October 2, 2017. Comments can be sent to firstname.lastname@example.org.
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