Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

An Update on the Proposed Tax Changes

By Kyle Westhaver, CIM & John Nicola, CFP, CLU, CHFC

View this update in PDF format.

In July the Department of Finance proposed the most significant reform of the tax system for Canadian private corporations since 1968. Minister of Finance Bill Morneau sparked controversy by introducing the new rules as “closing loopholes that are only available to some – often the very wealthy or the highest income earners – at the expense of others,” accusing business owners of not “paying their fair share.”  Despite months of lobbying. last week’s release of the updated income sprinkling proposal provided clarification that they intend to stubbornly move ahead – effective January 1st, 2018

In this update newsletter we:

  • Summarize the major flaws in the government’s narrative and why it continues to be important for business owners to contact their MPs
    about tax reform.
  • Look at planning options for both this year and next that can mitigate some of the worst impacts this tax reform might create.

Be sure to read our prior publications in the Tax Reform 2017 series:

“Tax Reform 2017: The Rest of the Story” | John Nicola – August 2017
“ Minister Morneau, Your Analysis is Incomplete” | John Nicola & Elliott Levine – September 2017
“ PRESENTATION VIDEO: What You Need To Know – Client Event Presentation” | John Nicola & David Sung – October 2017


INCOME SPRINKLING: Eliminates the ability for incorporated professionals and business owners to income split with family members by taxing dividends at the top marginal rate unless the shareholder receiving the dividend can show specific labour or capital contributions to the operations of the business carried on by the corporation.

What has changed? On October 16th the government announced it would “simplify the proposed measures with the aim of providing greater certainty for family members who contribute to a family business” and advised the updated legislation would be released “later this fall.” They waited until the House of Commons was adjourned last week to avoid any debate before the rules go into effect on January 1st. Ultimately, the government has forged ahead with the originally announced structure with a few exceptions:

  • You’re considered to work in the business if you currently contribute 20 hours of labour per week or have in the past five years. Few spouses or children will meet this test so it will still be left up to the CRA to decide if a “reasonable” contribution has been made.
  • You own 10% of the voting shares and value of the company and it’s not a professional corporation or service provider. Part owners of professional practices or companies that receive 90% of their revenues from services won’t qualify for this exception and would still pay tax on dividends at the top marginal rate. Services in Canada account for over three-quarters of our GDP and an even larger proportion of small business revenues. The release didn’t comment on why service companies should pay higher taxes than others but it’s clear the Liberal government has decided to double down on this strategy to single out the medical community.
  • The “business owner” is 65 years old. If only one shareholder is considered to be the legitimate owner of the business, under the proposed rules their spouse will be eligible to receive dividends at a marginal rate once the “owner” turns 65. This is meant to imitate the income-splitting ability of pensions. Unfortunately, it remains unclear whether this will actually be helpful because we still don’t know how the assets will be taxed inside the company. Details on passive income taxation and the grandfathering of corporately held investments are not expected until March (more on this below).

PASSIVE INVESTMENTS: The tax on passive income earned within corporations will still be 50%, but the system of refundable tax credits (Refundable Dividend Tax On Hand, or RDTOH) and tax-free distributable capital gains (Capital Dividend Account, or CDA) would be eliminated for income earned from 2018 onward. The consequence of this could be a combined personal and corporate tax rate of 70% or more on this type of income.

What has changed? In October the government announced all existing investments held in a private corporation would be “grandfathered” and the current rules would apply to an additional $50,000 of passive income going forward. The example provided in the announcement assumed $50,000 of additional passive income, which would result in the ability to save up to $1,000,000 of active income based on a 5% yield. It’s important to note that draft legislation has not been released on this proposal.

“Grandfathering” may mean the old rules will apply to earnings on earnings, CDA, and RDTOH, the proceeds from the sale of grandfathering investments, and income from any investments acquired with those proceeds. Or it may not. There is no way to know until the legislation is released, which the Minister indicated would be with the 2018 Budget.

DIVIDEND STRIPPING: Proposed changes focused on strategies that convert taxable dividends to capital gains and that multiply the capital gains exemption, but few of our clients have used these approaches in their overall tax planning.

What has changed? Most professionals agree this anti-avoidance rules to counter this type of planning was the most defensible part of the package; however, the draft legislation caused a high degree of unintended consequences including double taxation of private shares held at death.


The Liberal caucus believes the tweaks discussed by Morneau will take care of the unintended consequences. Nothing could be further from the truth. The truth is these rules remain fundamentally flawed and poorly designed. The Department of Finance received 21,000 submissions over the 75 day consultation period and Morneau announced the above changes only two weeks later. The impacts have clearly not been considered and the recent announcement of the income sprinkling proposal provides business owners only two weeks’ notice before coming into effect on January 1st. One of our clients recently shared a letter with us that they received from their Member of Parliament as a follow up to their concerns about the proposal updates. The MP’s response was political and full of self-serving platitudes, underscoring our opinion that this government prefers reciting rhetoric rather than listening to their constituents and taking the time to understand the real consequences of their proposal.

Using income sprinkling in cases where there is no direct contribution to the
business, in some cases someone making $300,000 can save about as much
on tax as the average Canadian earns in a year – $48,000.


It’s not difficult to determine where the Liberal caucus is getting their research…

The average income in Canada is estimated to be about $49,000 this year.
An incorporated professional earning $300,000 with a spouse and two adult
children can save about $48,000 in taxes by using just one of these loopholes.


Three months later this vague talking point continues to be their primary argument against income splitting.

Under current tax rules, an incorporated individual earning $300,000 can,
in some circumstances, save as much in taxes as the average Canadian
earns in a year.


To be clear, there is no realistic circumstance where this scenario is correct. Compared to an employee earning $300,000 and maximizing their RRSP with a $26,010 contribution, a business owner would have to split their income between seven family members to arrive at this result. You also have to assume that each person is over the age of 18 with zero earnings. Even if you assume the salaried employee does not make an RRSP deposit, the business owner would still need to split the income among five individuals.

This chart compares the tax paid by an individual earning salary and benefits worth $300,000 annually with a business owner with $300,000 of pre-tax profit. If the business owner were to be allowed to distribute all of the after-tax income between herself and her husband, their personal and corporate tax would be about $250 more than the salaried employee. Note: their income is not guaranteed. If they receive dividends as compensation they will not receive benefits such as EI/CPP/vacation pay and will have to fully fund all of the health benefits an employee would typically receive. Dividends are not “earned income” so the shareholders cannot save money in an RRSP. This type of income splitting is to be disallowed.

If only one of the shareholders is “the business owner” as contemplated by the proposed legislation and received the full dividend, that shareholder would pay $77,700 in tax personally. When the corporate tax is added the total is $115,500 or about $26,000 more than the salaried employee earning $250,000 in salary and $50,000 in non-taxable benefits.

If we use four non-income earning beneficiaries, the total family tax drops to $62,000 for as long as that is true. That is a savings of about $29,000. However, if each beneficiary earns as little as $12,000 annually in income from other sources, then the tax savings drops to about $12,000 annually. Not enough to make up for the loss of benefits and the risk of loss of income.

The major point here is that if all a couple does is income split between husband and wife then their combined tax is the same as the salaried individual and they have no tax sheltered registered savings that they can grow tax-free and income split when they retire.

Government has confirmed that changes regarding passive investment income
will not affect past investments or income earned on the past investments.


When Morneau announced current assets would be grandfathered it seemed to quiet the backlash. However, the term grandfathering could be misleading. The intuitive understanding would be that if a corporation has a portfolio with a value of $1M when the rules change, that amount will always be grandfathered from being taxed under the new rules. However, the wording around substitution makes us question if this is the case.

  • What happens when one sells an existing asset and buys a new one?
  • What about when an existing asset matures, such as a bond, mortgage, or term deposit?
  • What if you wanted to change advisors and transfer your investments?
  • What if you simply wanted to reduce your exposure to a particular asset class?

Will this result in the assets being taxed under the new rules? If so, then over time it’s inevitable the entire portfolio will be taxed under the new rules.

You may have heard these new rules result in tax rates of about 72% (in BC) on interest income and almost 60% on capital gains. Would it make sense
to leave your savings to be taxed at these levels until income-splitting is available at age 65?  The devil is in the details.

How can this level of tax on CCPC be justified when compared to a public corporation?

Public companies in Canada pay tax of 26% to 31% in 2017 (depending on the province where the income is earned) and dividends distributed from after-tax earnings are considered eligible dividends on which individual shareholders are liable to tax of 31.3% in 2017 (34% in 2018). This means if the Royal Bank buys the same investment as a CCPC and then pays a dividend to a taxable shareholder in Canada, the combined corporate and personal tax rate in BC will be about 50% next year at the maximum. However, a CCPC will pay 50% tax (double the rate of the Royal Bank) and if it then pays a dividend to a shareholder the tax rate in 2018 will be as high as 44% on what is paid out.  This is how a 72% blended tax rate is achieved.

The CCPC and the Royal Bank are both taxable corporations in Canada and this model says that if they invest in the same passive asset and they pay
the same dividend to a shareholder, the difference in tax is that the CCPC/ shareholder will pay 44% more tax than the Royal Bank/ Shareholder.

It’s hard to see how this playing field is level.


There is no “one size fits all” solution.

Solutions will differ for each family and also change over time. More than ever, a customized approach will be required. The following strategies will make sense for some families, but your first step should be to meet with your advisors.


“Super Dividends”

  • The most viable option available is to pay a higher dividend than usual to spouses and children (older than 18) as the income sprinkling rules won’t
    be effective until 2018.


Individual Pension Plans

  • IPPS will make sense for many clients as they approach the $50m000 maximum for new passive income or if the grandfathering of assets comes unsustainable over time. The appropriate timing will vary. IPPs already made sense for many of the families we work with but the proposals are likely to expedite implementation.

We are reviewing a number of other strategies that could prove to be effective in a post-tax reform world.

  • Separate grandfathered assets from ”new” assets in different corporate entities
  • Using (or increasing existing) corporate-owned life insurance with or without leverage
  • Looking at new models that would increase compensation from salary/bonus vs. dividends
  • Modifying portfolio structure to reduce the amount of the return that is taxable as ordinary income
  • Making future charitable contributions corporate vs. personal

The Fact of the Matter is… Continued Lobbying is required.

It is critical to remember that the legislation for all the proposals will not formally pass through the House of Commons and become law until the Federal Budget in March. Writing a letter to your MP and being active in your business associations will make a difference.

This issue is far from resolved and requires continued vigilance from those who see the inequity in these rules. With sustained lobbying and controversy
surrounding the Finance Minister, its clear Canadians’ confidence in Morneau’s agenda is being tested. At the end of the day, elected officials have jobs on the line, and come March, Canadian’s will be 18 months away from casting their ballot.

We encourage you to continue lobbying your Member of Parliament to abandon the proposed changes and begin a formal commission on tax reform.

Please click HERE for a template email to send to your MP.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. NWM is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.