Finance provides various clarifications on its July 18, 2017 proposals

Comments made by Finance officials at the Roundtable held on Monday afternoon on the July 18, 2017 Consultation Paper and legislative proposals of the Department of Finance include:

Q.4 There is an intent for the passive income proposals not to affect existing investments held in a corporation.

Q.7 If, for example, mother provides start-up capital for her son’s company, Finance accepts that it would be reasonable for her to receive a high return to reflect the high risk.

Q.8 There will not be a complete carve-out for pipelines, but Finance is thinking about some form of relief to avoid the double taxation (first on the deceased, and second on the estate) that could arise, especially where a death occurred before July 18, 2017.

Q.9 Finance is not aware of any plans to increase capital gains rates. Finance is struggling with whether it is possible to provide relief for intergenerational transfers of businesses without generating quite substantial losses of tax revenues.

Q.10 S. 246.1 was developed because the courts were not observing the scheme of the Act to prevent surplus stripping or, at least, the conversion of dividends into capital gains.

Q.11 The surplus stripping changes are intended to focus on non-arm’s length transactions, so that they would not apply, for example, where an arm’s length purchaser uses the assets of the target to pay off acquisition debt. S. 246.1 is not intended merely as a backstop to s. 84.1 so that, for example, it could apply, for example, if there were s. 84(2) avoidance.

Q.12 The passive income discussion in the Consultation Paper was just a “diagnostic,” so that the next stage is to see whether the government is interested in advancing that proposal.

Some of the above points were also made or elaborated on in the morning session of Finance speakers. An additional point made in the morning session is that, although Finance considers that its passive income proposals advance integration, it should be kept in mind that if a self-employed individual earns 46% after-tax on her business earnings and then invests those earnings, her investment return thereon will also be subject to income tax, so that fairness suggests that the total tax borne on reinvested corporate business earnings that are similarly reinvested and ultimately distributed should also ultimately bear tax of well over 50%.

Neal Armstrong. 25 September 2017 CTF Finance Roundtable on 18 July 2017 proposals and Morning Session on Setting the Stage.