Specifics of the Proposed Changes

The proposed changes to increase taxes on small businesses will impact your ability to split income with your family members, fund your children’s post-secondary education, save for your retirement, and remove funds you have saved for your retirement. We have provided three major implications (there are more that are too complex for this discussion) below and some steps that you might consider for the remainder of this year and for future years. The actual legislation has not been passed, so these are only some thoughts based on the wording of the proposals.

Income Sprinkling

This is a tax-planning approach that takes income that would normally be taxed in one individual’s hands and spreads it across several individuals, thus reducing the overall personal tax payable on income removed from the corporation. Canadian personal income tax rates are progressive – the greater the income, the higher the rate of tax payable. Paying to more than one taxpayer takes advantage of multiple lower tax brackets. Income sprinkling is often accomplished by paying family members dividends either on different classes of shares or through a family trust. Like with a shareholder of a public corporation, the dividends are not based on the work performed by the family member (though family-run businesses often require the support of all family members).

Suggestions for the remainder of 2017:
- Fully utilize any opportunities to income sprinkle with family members, whether they are active in the business or not, by way of dividends (if the corporate structure so allows).
- Consider paying the active business owner a salary for 2017 to establish RRSP room for 2018 and future years.

For 2018 and onward:
- The proposals are not finalized yet but will most certainly restrict income sprinkling in 2018 to a reasonable amount based on the work performed. Businesses will want to take advantage of the ability to pay a reasonable salary to lower-income family members.
- The active business owner should be compensated by sufficient income ($144,500 maximum) to generate up to the maximum RRSP contribution room.
- RRSP contributions by the active business owner should be made to the lower-income spouse’s RRSP (spousal RRSP) so that the lower-income spouse will have income when retirement age is reached.
- Larger businesses may wish to consider establishing an Individual Pension Plan (IPP) – a pension plan established for one or more family members in a family-owned business. Company contributions are deductible during the active business owner’s working years and used to fund a retirement pension.

Contributions can be in excess of those normally available for RRSPs. IPPs are, however, costly to establish. (Interestingly, Canada’s current finance minister made his family fortune selling these plans.)
- Consideration should be given to RESPs to fund post-secondary education for children.

Investing in Holding Companies

There are periods of time when a business generates more cash than is required by its owners to fund their lifestyle. Extra cash can be retained in the corporation but is subject to business liability. To protect funds from such liability, we often recommend establishing a holding company. Regardless of whether a holding company is used or not, investments held within a corporate entity will generate what is referred to as passive income. Two examples are rental income and dividends from an investment portfolio of public companies. The tax rate for passive income is much higher than active income such as that earned from a business. However, some of the tax on passive income is refundable when it is paid to a shareholder. The tax act is designed to make sure that the tax paid by the corporation and by the individual taking that income from the corporation is the same as if it had been earned directly by the individual in the first place. However, the tax deferral of monies invested in a holding company results in a significantly higher rate of retirement-fund accumulation than is available to individuals alone. This is certainly an advantage but keep in mind the principle is really the same for RRSPs. Tax in only paid when moneys are withdrawn.

There are no specific proposed legislative changes for holding companies, but the government is looking at ways to eliminate the advantage of saving for retirement in a corporate structure beyond the money required to fund the normal operations of the business. The government has indicated that any changes will not impact existing passive investments but will, however, apply to passive investments generated subsequent to any enacted legislation. Any changes will likely remove the incentive to save within a corporate structure by raising the tax rate on passive investment to a level that forces owners to remove corporate profits and by subjecting them to personal tax.

However, perhaps more important is the ability to split retirement funds with a spouse. Most business owners accumulate retirement funds within a holding company with the understanding that those funds can be split with a spouse upon retirement. The proposed changes now retroactively disallow this splitting of funds that was, in fact, encouraged in the past. There is no ability for business owners nearing retirement age to adapt to this change, so it effectively puts them at a disadvantage compared to employees who have been able to use RRSPs and who will be allowed to split their retirement income with their spouse.

For the remainder of 2017:
- There are no definitive legislative proposals yet. Continue to use your holding companies as before, but be aware that the rules of the game will be changing.
- Consider crystallizing any unrealized capital gains prior to December 31, 2017, and taking the resulting tax-free dividend as a result.
- Begin building RRSP room by taking a salary for 2017.

For 2018 and onward:
- As discussed above for income sprinkling, use spousal RRSPs to generate retirement income in the lower-income spouse’s name.
- We are unable to give any additional specific guidance at this time.

Lifetime Capital Gains Exemption

Individuals selling shares of a business are usually subject to capital gains. If the business is a qualified small business corporation (QSBC), the tax on the sale can be significantly reduced if not eliminated. To qualify as a QSBC, a corporation must be an active business where more than 90% of its assets are used in the active business. For 2017, a shareholder can shelter from personal tax a gain of up to $835,716 (indexed each year for inflation) on the sale of QSBC shares. There can be multiple claims for the exemption, with each shareholder qualifying either through share ownership or participation in a family trust.

The proposed changes would restrict claims made by individuals in the years before they attain the age of 18, limit the claims otherwise available to the shareholder’s involvement in the corporation (much like with the income-sprinkling rules discussed above), and restrict any claims passed through a trust.

For the remainder of 2017 and onward:
- Increase your efforts to sell any business that is currently offered for sale.
- Consider obtaining a formal valuation of your business. This valuation would be used should your advisors determine that an estate freeze would be beneficial.
- Consider utilizing your lifetime capital gains exemption on QSBC shares by performing an estate freeze.
- Consider transferring common shares from a trust to the beneficiaries of the trust in preparation for an estate freeze.
- The above courses of action are subject to change once the final legislation is released. In the meantime, however, staying the course is prudent.

Suggestions for the remainder of 2017:
- Contact your MP and ask him/her to reconsider these proposals or to at least extend the consultation process to find a better solution. Submissions (due no later than October 2, 2017) can be sent to fin.consultation.fin@canada.ca

Filed in: Advice Articles



Privacy Policy

Bluenose Accounting (the “Firm”) is committed to maintaining the confidentiality, security and accuracy of your personal information. The Firm collects uses and discloses personal information related to its clients and employees to the extent required to provide requested services for those clients, to fulfill its professional responsibilities and operate its business. We are committed to protecting the privacy of information in our possession and control. To that end, the Firm has established a Privacy Policy to protect the privacy rights of its clients, employees and others. The Firm’s Privacy policy sets out principals and guidelines it follows in order to meet its privacy commitments and complying with provincial and federal privacy legislation. This policy relates to the collection, use and disclosure of personal information by the firm, its partners and employees.

What is Personal Information?

The firm defines personal information as any information that the firm receives as a part of servicing individuals, or indirectly, through clients that are organized as corporations, not-for profit organizations, charities or other like organizations in addition to information related to its employees and partners. Such information would include, but is not limited to, names, addresses, telephone number, age, sex, marital status, identifying numbers, education status and medical history. A more detailed definition can be found in the Freedom of Information and Protection of Privacy Act of Nova Scotia. The Firm only collects information required to provide the services requested and agreed upon. Such information is contained as required within filings with government agencies or as part of its working papers as required by professional standards, rules of professional conduct and regulation.

The Firm’s Commitment

The Firm has established and put into place policies and procedures designed to protect personal information. The firm has communicated to its partners and employees its policies with respect to privacy and has established responsibilities for all individuals with access to private information. The firm has designated Anthony Fielding Ph.D., CA (anthony@bluenoseaccounting.com) as its Privacy officer.


Information provided to us, including that collected from our website, is used solely for the purpose of the service(s) indicated and is often, but not always, set out in its engagement letter. Should you advise us at any time that you no longer consent to the use of the personal information that you have provided to us, we will take your information off our database.


The Firm protects the privacy of personal information in its possession by using security safeguards appropriate to the sensitivity of the information. Such safeguards include physical restriction (locked premises and security systems) and electronic protection (password protection and encryption).

Legal Disclaimer

Although we make every effort to preserve user privacy, we may need to disclose personal information when required by law when we have a good-faith belief that such action is necessary to comply with a current judicial proceeding, a court order or legal process.

Other Use of Your Information

Except as set out in this Privacy Policy, we do not make any other use of the personal information which you provide to us unless you have consented to its use for any other purpose. We do not sell or disclose your personal information to anyone, except as required by law.


In using our website, you consent to the collection, use and disclosure of your personal information in accordance with this Privacy Policy.


Terms of Use

Terms of Use

The use of this web site is governed by the terms and conditions as set out below. By using this web site, you have agreed to be bound by these terms.


The information contained within this site, including the underlying HTML, text, images and any other content is the property of Bluenose Accounting (the “Firm”). Any reproduction or redistribution of content of this site without the express written permission of the Firm is strictly forbidden.


The information provided in this site is free of charge and is for information purposes only. Such information should not be relied upon or used as a basis for decisions. The Firm has made all efforts to maintain the accuracy of the content of this web site. Information provided on this web site is provided without any warranties of any kind. The Firm assumes no responsibility or liability for damages that may arise from the use of this site or of any information contained within.

External Links

The Firm may provide external links to third party sites and some content provided on this site may actually be from third party sites. The Firm assumes no liability for the accuracy of third party information contained within this site or in those reached through links contained within this site. Any links are provided for information purposes only and are not to be construed as an endorsement by the Firm. The Firm has not reviewed or otherwise attempted to verify the accuracy of information contained within such sites.

The Firm assumes no responsibility or liability for damages that may arise from the use of these links including any computer security issues such as, but not limited to, viruses, Trojan horses or other disruptive code which may be downloaded or transferred from such linked sites.


By using this site, you are agreeing to the terms and conditions as set out above. Any use of information contained within this site is not to be construed as professional advice and the use of such information does not relieve you from applying the standard of care and due diligence relevant to the use of such information contained in this web site. You are solely responsible for verifying the accuracy and reliability of all information contained within this web site.