Prime Minister Justin Trudeau, Finance Minister Bill Morneau and Small Business and Tourism Minister Bardish Chagger met in Stouffville, Ontario on Monday, October 16, 2017 to announce the change to the tax rate and also to talk about the Liberals’ tax proposal and how it will apply to income splitting and capital gains exemption.
Currently farmers are able to income split by designating different portions of a farm’s income to family members how they choose. This means that family farm corporations are able to transfer income from an individual farmer in a higher tax bracket to a family member in a lower tax bracket or one that may not be taxable at all. However under the new rules only corporations with family members who “meaningfully contribute to the business” will be exempt from the proposed changes. At this moment only 50,000 family-owned private businesses use income sprinkling.
Capital Gains Exemption
An individual who owns farm property (land or building), an interest in a family farm partnership, or shares in a family farm corporation may be able to claim a $1,000,000 lifetime capital gains exemption (LCGE) when the farm property is sold. Tax planning on farms has often involved using the capital gains exemption of various family members, allowing the $1 million dollars in capital gains exemption to be multiplied by the number of family members owning the eligible farm property.
Currently there will not be any proposed measures or changes to the Lifetime Capital Gains Exemption. However at this time the Finance Minister does not have any details as to what will be revised in regards to the family farm transfers and that tax changes will not affect this.
Small Business Tax Rate
Reducing the overall rate on small businesses will help to drive growth in the agricultural sector and help to boost the competitiveness of Canadian Farmers. Starting January 1, 2018 the tax rate for small businesses will drop from 10.5% down to 10% and on January 1, 2019 it will drop down to 9%.
Monday’s Agricultural Summary:
- The government plans to move ahead with its proposed measures to restrict income splitting or ‘sprinkling.’ Only corporations with family members who “meaningfully contribute to the business” will be exempt from proposed changes. According to the government, approximately 50,000 family-owned private businesses (or 3 percent of CCPCs) use income sprinkling.
- Proposed measures limiting access to the Lifetime Capital Gains Exemption will no longer be considered in the tax proposal.
- The federal government intends to lower the small business tax rate from 10.5 percent to 10 percent effective January 1, 2018, and 9 percent, January 1, 2019. This is the rate applied to a Canadian-controlled private corporation’s income, up to $500,000 (meaning the maximum savings will be $7,500.)