Forgot your account information?  |  Create a CME account

Proposed changes to the tax treatment of Canadian-Controlled Private Corporations 

Small businesses are the engine of the Canadian economy. In the manufacturing sector alone, there are nearly 68,000 establishments with fewer than ten employees and another 20,000 with fewer than 100 employees. Many of these manufacturers are CCPC’s and collectively they employ over 1,000,000 Canadians.  Many of these companies are our members, engaged in risk-taking as they build their businesses and compete locally and internationally. 

CME believes that an internationally-competitive tax system is critical to attract new manufacturing investment to Canada and to foster entrepreneurship and growth. From this, we have three specific guiding principles that we believe must govern any and all changes to the tax system for manufacturers to thrive in Canada. The tax system should: incentivize investment and growth; reward and support risk-taking, innovation and entrepreneurship; and be simple, clear and fair. 

Background 

In its 2017 budget, the federal government announced that it would be making changes to the tax treatment of Canadian-Controlled Private Corporations (CCPCs). These changes were motivated by the government’s desire to treat like income earners alike: There are a number of strategies available to incorporated individuals that reduce the amount of taxes they pay compared to someone earning the same income as a salaried individual.

The Budget highlighted three specific issues:

  • Income sprinkling: Individuals who own a CCPC are able to distribute their income among family members through a variety of means, allowing more of that money to be taxed at lower brackets and therefore reducing the overall tax paid.
  • Treatment of passive investments inside a corporation: Because of preferential small-business tax rates, individuals making passive investments (in stocks, bonds or other assets not directly related to the business itself) inside a CCPC pay less in tax compared to someone investing the same amount out of their normal wages.
  • Conversion of income into capital gains: Because half of capital gains are tax-exempt, if an individual uses a CCPC to convert its regular income into a capital gain, they pay a lower tax rate on that income.

On July 18 2017, the federal Department of Finance issued a paper, Tax Planning Using Private Corporations that spelled out the specific issues and proposed solutions in considerable detail. The release of that paper also triggered the beginning of a 75-day consultation process on the proposed changes, some of which could be in place as early as January 1, 2018. 

Concerns for Manufacturers

CME understands the motivation behind the proposed changes to the taxation of CCPCs,  However, based on our analysis and consultation with members, we are concerned that the proposed changes will impact a much broader range of business activities and will strike well beyond their intended target, potentially resulting in significant negative unintended consequences for small manufacturers.  

Some of our specific concerns include the following: 

  • The proposed tax changes reduce the incentive and economic return on entrepreneurship, risk-taking, business investment and job creation; 
  • In an effort to treat like income alike, they fail to account for key differences between small-business income and employee salaries; 
  • They raise the cost of doing business and add to the complexity of an already burdensome tax system; and 
  • They inconsistently apply the “tax fairness” principle and create new instances of unfairness in the process. 

Recommendation

CME welcomes some of the government announcements that clarified rules for the tax treatment of CCPC and that addresses some of the manufacturers’concerns regarding the proposed tax changes. While CME believes these steps improve upon the reforms as originally proposed, we maintain that the Government of Canada should be focusing its efforts not on isolated tax amendments, but on comprehensive reform that helps attract new manufacturing investment to Canada and that fosters entrepreneurship and growth.  

CME urges the government to continue its reforms of the tax system with the purpose of incentivizing investment and growth; rewarding and supporting risk-taking, innovation, and entrepreneurship through simple, clear and fair rules.

 Resources

 

Powered by: Ignite Web Solutions

National Office

Alberta British Columbia
Manitoba New Brunswick
Newfoundland & Labrador Nova Scotia
Ontario Québec
Prince Edward Island Saskatchewan

We are Canada's largest trade and industry association. We are Canadian Manufacturers & Exporters.

View site in:

English

MEQ est une division de Manufacturiers et exportateurs du Canada (MEC), la plus importante association commerciale et industrielle au pays fondée en 1871.

Voir le site en :

Français