The federal government has made several amendments in the past month to its proposed tax changes for private corporations.
Since July 18, when the initial proposal was released, there have been many areas of concern on how the proposal would affect family farm corporations.
Some of the most worrisome parts of the proposal have been dropped, and this column will provide information on how things stand now.
A common term you may have heard in the proposed tax changes is “anti-surplus stripping.”
An example of “surplus stripping” that would have been affected is a common transaction for farmers, who have a buildup of surplus cash in their corporation, to sell land owned personally to their corporation.
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That extracts the surplus cash from the corporation, but it usually triggers a capital gain.
However, you can avoid the tax bill by using the capital gain exemption, except for what might be necessary under the alternative minimum tax.
Under the rules as first proposed, there was concern this would not be allowed and the transaction would result in paying tax at the dividend rate.
However, the government has confirmed it will no longer pursue this section of the proposed rules.
The government has also said it will drop other proposed rules that revolve around the lifetime capital gains exemption.
These rules would have prevented anyone from claiming the lifetime capital gains exemption for gains that accrued on qualified farm property while it was held in a family trust or while the individual was younger than 18, unless it was an inherited asset.
The government has also focused on the treatment of passive income in a corporation. There continues to be concern that such income may result in much higher tax than it did in the past.
One example of passive income in a farm corporation would be the money from cash renting land to a neighbour. Passive income could also come in the form of interest earned on savings or investments in your farm corporation.
However, relief has been an-nounced in the form of a $50,000 buffer for passive income that will be taxed as it was in the past. We will continue to watch for updates in this area because there is still a lot of ambiguity on how these rules will apply.
At this time you should consider that the government has announced that current investments will be grandfathered under the old rules and the new rules will not apply to AgriInvest accounts.
Income sprinkling is another area affected by the proposed rules.
This is a way to split a private corporation’s income among family members, most often in the form of a dividend, to take advantage of each family member’s tax brackets.
The changes involve reasonability tests that will be used to judge if dividends issued to family members are appropriate. The government has not dropped these changes but has announced it will revise its proposal to simplify the rules. None of the changes mentioned have been made into law at this time.
However, it is important to start planning for these changes and to consult with your professional advisers to determine how these changes could affect you.
Riley Honess and Katy Jacklin of KPMG contributed to this article.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
