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The government estimated that only 3 per cent of CCPC owners or 50,000 family-owned private businesses are sprinkling income and thus the vast majority of private corporations won’t be impacted by the proposed income sprinkling rules.

Lifetime Capital Gains Exemption

The government also announced that it is abandoning the draft rules that would have severely limited access to the Lifetime Capital Gains Exemption. The LCGE provides a tax exemption for capital gains realized by individuals on the sale of qualified small business shares, subject to a lifetime limit of $835,716 ($1,000,000 for farm or fishing properties).

This about-face was in response to a number of submissions received during the consultation process which “have identified potential unintended consequences associated with the proposed measures to address the multiplication of the LCGE … (including) concerns … raised on the potential impact on intergenerational transfers of family businesses.”

Similar concerns were raised on the proposed measures to convert dividend income to capital gains, which “could have impaired estate planning and the transfer of farms and small businesses to the next generation.” This statement suggests that amendments to the income conversion rules may also be forthcoming.

Passive investment income

Finally, although today’s announcement was silent on the government’s plans to tax passive income retained in a private corporation at effective rates as high as 73 per cent, it did acknowledge some of the concerns raised during the consultation process and now seems to have a better appreciation for the the way in which passive investments within a private corporation are used, particularly by small and medium-sized businesses, to manage personal income risk in the case of a downturn, sick leave or maternity or parental leave. In many cases passive investments are also used as a retirement tool for small business owners since other savings vehicles, such as RRSPs and RRIFs, are not sufficiently flexible and adaptable to address business volatility.

A further announcement on the status of this proposal is expected this week.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.