Canada's 2018 Budget has provided the long-awaited details of the Government's proposal to limit the tax benefits that can be derived from the holding of passive investments in a private corporation.
In July 2017, the Government consulted on three proposed changes to the tax planning rules intended to prevent private corporations from gaining undue tax advantages. After a backlash, the Government that autumn dropped plans to prevent the conversion of a private corporation's regular income into capital gains. It did nevertheless introduce legislation to restrict income sprinkling by private corporations, albeit in modified form.
The Government also confirmed last October that it would include in Budget 2018 detailed proposals for limiting the tax benefits of investing passively in private corporations, and that it would in the intervening period examine all deferral benefits arising from passive investment.
It did however announce at the time that it would introduce a passive investment threshold of CAD50,000 (USD39,159) per year for future, go-forward investments, which it said is equivalent to CAD1m in savings, based on a nominal five percent rate of return, and that there would be no tax increase on investment income below this threshold.
Finance Minister Bill Morneau delivered his 2018 Budget on February 27.
According to Budget documentation, the Government will, as promised, move ahead with its plans, but will do so in a "more targeted and simpler manner."
In the first instance, the Government intends to limit the ability of businesses with significant passive savings to benefit from the small business tax rate. Under the current rules, the small business deduction limit allows for up to CAD500,000 of active business income to be subject to the lower small business tax rate.
The Government said that it will phase out access to the lower rate on a "straight-line basis" for associated Canadian-controlled private companies (CCPCs) with between CAD10m and CAD15m of aggregate taxable capital employed in Canada. The Government said that this approach will "reinforce the principle that the small business rate is targeted to support small businesses, which tend to have more difficulty accessing capital, so they can reinvest in their active business, not accumulate a large amount of passive savings."
The Government will seek to introduce an additional eligibility mechanism for the small business deduction, based on the corporation's passive investment income.
If a corporation and its associated corporations earn more than CAD50,000 of passive investment income in a given year, the amount of income eligible for the small business tax rate would be gradually reduced. The small business deduction limit would be reduced by CAD5 for every CAD1 of investment income above the CAD50,000 threshold (equivalent to CAD1m in passive investment assets at a five percent return).
As a result, the business limit would be reduced to zero at CAD150,000 of investment income (equivalent to CAD3m in passive investment assets at a five percent return).
The tax applicable to investment income would remain unchanged, unlike under the original July 2017 proposal. No existing savings would face any additional tax upon withdrawal. Capital gains realized from the sale of active investments or investment income incidental to the business would not be taken into account for the measurement of passive investment income for the purposes of this measure.
The Government said that the new approach would be much simpler to comply with.
The second major reform announced in the Budget will seek to limit the tax advantages that larger CCPCs can obtain by accessing refundable taxes on the distribution of certain dividends. The Government has proposed that CCPCs should no longer be able to obtain refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate. Refunds would continue to be available when investment income is paid out.
The two measures would apply to taxation years that begin after 2018. The Government expects them to raise CAD925m a year.
The Government estimates that less than three percent of CCPCs will be affected by these changes – roughly around 50,000 private corporations. It said that more than 90 percent of the tax revenues from the measures would be generated from corporations whose owners' household income is in the top one percent of the income distribution.
The Budget also contained a number of measures designed to crack down on tax avoidance and tax evasion. The Budget proposed that the Government:
Andorra and Cyprus have signed a DTA, Andorra's Government announced on May 18, 2018.
Singapore and Brazil signed a DTA on May 7, 2018.
A DTA between Morocco and the Congo was signed on April 30, 2018.
The Mauritius Revenue Authority on March 19, 2018, published Government Notice No. 36 of 2018, confirming the entry into force of a Protocol updating its DTA with Barbados.
Legislation allowing for a DTA between the Netherlands and Malawi was ratified on April 30, 2018.
Switzerland and Brazil signed a DTA on May 3, 2018.
Slovakia on April 27, 2018, published Notice 123/2018 confirming the entry into force of its DTA with Ethiopia.
The Indian Government on May 7, 2018, announced that the DTA Protocol signed with Kuwait entered into force on March 26, 2018. A notice was published in India's Official Gazette on May 4, 2018.
The DTA between Slovakia and Iran became effective on May 1, 2018.
A protocol to the DTA between Russia and Sweden was signed on April 24, 2018.
Serbia and San Marino signed a DTA in Belgrade on April 16, 2018.
Kyrgyzstan and the Czech Republic agreed a draft DTA during four-day talks that ended on April 19, 2018.
Malta and Ethiopia signed a DTA on April 12, 2018.
Saudi Arabia's Cabinet on April 17, 2018, authorized the Minister of Finance to sign a DTA with Latvia.
The United Kingdom on April 24, 2018, released The Double Taxation Relief and International Tax Enforcement (Kyrgyzstan) Order 2018, which would ratify the DTA signed with Kyrgyzstan.
Latvia and Costa Rica agreed on April 13, 2018, to begin negotiations towards a DTA.
Austria's Council of Ministers on April 18, 2018, authorized negotiations on a Protocol to the DTA with Uzbekistan.
A bill was tabled in Belarus's House of Representatives on April 19, 2018, to ratify the DTA signed with the United Kingdom.
The DTA between Luxembourg and Cyprus entered into force on April 24, 2018, following its publication in Luxembourg's Official Gazette on April 20, 2018.
The Swiss Federal Council on April 18, 2018, submitted for parliamentary approval dispatches relating to a Protocol to the DTA with Ecuador, and a new DTA with Zambia.
Chile's Chamber of Deputies approved the DTA with Uruguay on April 19, 2018.
Kazakhstan's President on April 9 signed legislation ratifying a protocol to the DTA with Belarus.
Macau's Office of the Chief Executive on April 3, 2018, issued Order No. 63/2018 authorizing the conclusion of a DTA with Vietnam.
Latvia and Chile discussed launching DTA negotiations during a two-day meeting that concluded on April 10, 2018.
Finland's President on April 6, 2018, authorized the signature of a DTA with Hong Kong.