On July 18, 2017, the Honourable Bill Morneau, Minister of Finance, released a paper
for consultation, along with draft legislation and explanatory notes intended to “close
loopholes and deal with tax planning strategies that involved the use of private
One of the key issues addressed was private corporations that hold passive investment
portfolios and the perceived advantage to taxpayers that do so. In this update, we will
take an in-depth look at the current rules that apply to these investments, as well as the
proposed changes being contemplated by the government.
Corporate business income is generally taxed at lower rates than personal income,
which leaves corporations with more money to further invest in their businesses. There
are times when a private corporation’s earnings are beyond what is needed to re-invest
and grow the business. In such cases, the corporation may invest some of its earnings
in passive investments.
The government is of the view an unfair tax advantage exists, as shareholders of a
private corporation may achieve greater returns on passive investments held through a
corporation than employed individuals holding investments personally.
No legislative proposals regarding the taxation of passive investment were released in
conjunction with the paper. However, the government is contemplating changes to the
tax regime and methods for determining the tax treatment of dividends paid from
passive investments and has stated new rules will be designed in the coming months. If
enacted, these rules can potentially be amongst the most significant legislative changes
in the last 45 years.
2. Current Rules
In general terms, investment income earned by a corporation and distributed to
shareholders as dividends bears an amount of tax that is equivalent to what an
individual earning the investment income directly would pay. Accordingly, from a tax
perspective, an individual with funds to invest is generally indifferent between investing
the funds personally or through a corporation. The current provisions, which were
designed to equalize taxes payable by individuals and corporations on passive income,
have been in place since 1972.
2. Current Rules
3. Proposed Changes
4. Impact to You and Your
5. Consultation with
6. What do you need to do?
Government of Canada Proposed Tax Changes for Private Corporations | 2017
MNP TAX UPDATE Part 2: Passive Investments
How the Proposed Legislation Impacts You and Your Business