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 the conversion of income into tax-exempt or lower-taxed capital gains. In this update, we will take an in-depth look at the proposed changes
relating to this type of tax planning.
1. Overview of Proposed Legislation
As part of the consultation paper, the federal Minister of Finance addressed the tax
strategies commonly used by advisors and corporate business owners to trigger capital
gains to distribute after-tax earnings of corporations. This type of planning often
stemmed from the arbitrage in tax rates on capital gains and dividend income. This
arbitrage varies by province. For example, in Alberta, a capital gain realized by an
individual in the highest income bracket is taxed at a rate of 24 percent (one-half of the
top federal and Alberta combined personal rate of 48 percent), whereas a non-eligible
dividend of the same individual is taxed at 41. 29 percent. The disposition of assets by a
corporation can be structured to take advantage of the lower tax rates applicable to
capital gains and tax-free capital dividends to achieve a similar result.
The federal government has proposed two measures to discourage this type of tax
Extension of Surplus Stripping Anti-Avoidance Rule
A long-standing anti-avoidance rule prevents individuals from extracting, or “stripping”
surplus funds from a corporation tax- free by recharacterizing certain proceeds of
disposition received on the sale of shares to a dividend. Without this rule, the sale of
shares by an individual could be structured such that the individual receives proceeds
that are effectively a distribution of corporate surplus taxed at the lower capital gains
rate, which would otherwise be taxed at the dividend rate.
The anti-avoidance rule generally prevents this type of structuring by excluding from an
individual’s tax cost of a share any part of the proceeds previously sheltered by the
individual’s (or a related individual’s) Lifetime Capital Gains Exemption (LCGE). This
effectively prevents individuals from extracting corporate funds tax free by selling such
shares to a related corporation at a later time.
2. Overview of Proposed
3. Impact to You and Your
4. Consultation with
5. What do you need to do?
Government of Canada Proposed Tax Changes for Private Corporations | 2017
MNP TAX UPDATE Part 3: CAPITAL GAIN CONVERSIONS
How the Proposed Legislation Impacts You and Your Business