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Small Business Tax Rate Decreasing in 2018

For Canadian-controlled private corporations (“CCPCs”) claiming the small business deduction, the net federal tax rate is being reduced from 10.5% to 10% and the net Ontario tax rate is being reduced from 4.5% to 3.5%.  As a result, the combined tax rate for CCPCs in Ontario on the first $500,000 of active business income is decreasing from 15% to 13.5%. These measures are meant to offset other changes such as increases to the investment tax rate and limitations being introduced on income sprinkling.

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Income Sprinkling Rule Changes

Effective from January 1, 2018 and subsequent taxation years, Finance is moving forward on restricting income sprinkling for private corporations as part of its commitment to tax fairness. Prior to the introduction of these rules,​business owners could potentially redirect their income to family members that pay a lower rate of income taxes.  As a result of these changes, new rules have been introduced to determine whether a family member is significantly involved in business, and thus is excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income or TOSI). The changes include a new set of tests to determine whether recipients of such income will be subject to the TOSI rules.  For more information on these rules or to determine if you will be impacted as a result of these changes, feel free to contact us.

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Changes to the Principal Residence Exemption

In 2016, the Department of Finance introduced significant changes to the principal residence exemption rules under the Income Tax Act (Canada). The mandate of these changes was specifically to “improve tax fairness by closing loopholes surrounding the capital gains exemption on the sale of a principal residence”. The proposed changes to the principal residence exemption rules effectively limit the ability of certain taxpayers to reduce or eliminate the capital gain on the sale of their home.

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Valuation “Double-Dipping”

The valuation concept of “double-dipping” refers to the double counting of marital assets; once in the property division and again in the support award. This theory is premised upon the fact that the same cash flows capitalized to determine the value of a spouse’s business (an asset subject to equitable distribution) are also considered a component of that spouse’s total income for support calculation purposes.

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Foreign Reporting Requirements

Recent legislative changes to foreign reporting requirements for Canadian taxpayers requires the reporting of all specified foreign property owned during the year if the cost base of all specified foreign property exceeds $100,000 at any point during the year.

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