3 Legal Updates: Business income tax, asset sales and auditing policy
ELIMINATING SOME INCOME TAX ADVANTAGES
On July 18, 2017, the Federal Department of Finance announced proposed changes to the Income Tax Act (the ITA) in Canada that are intended to “level the playing field” by removing certain tax advantages that for decades have been part of tax planning for many family-owned businesses operating through private corporations in Canada.
The Department of Finance has declared its intention to limit or eliminate certain tax advantages in relation to income splitting, the multiplication of the lifetime capital gains exemption, the conversion of regular corporate income and capital gains, and the deferral of tax on passive income earned in a private corporation.
Among other things, the proposed legislation would eliminate the benefit of commonly used tax planning strategies for small businesses operated through private corporations, such as retaining profit in a corporation or a related holding company and then investing those retained earnings in passive assets; declaring dividends to children and spouses who are not active in the business operated by the private corporation, particularly university-aged children, to take advantage of their lower tax rates when paying tuition and other costs; and applying the lifetime capital gains exemptions of non-active family members on the capital gain realized on the sale of the shares of the corporation through which the family business is operated.
If the proposed legislation is passed — and most commentators predict that most of it will be — many of the changes take effect next year. However, some of the proposed measures would take effect retroactively to the date of the announcement — so that the additional tax burden would have to be reported and paid for the current tax year.
The Department of Finance has requested input on its proposed amendments to the ITA by October 2, 2017. To determine the extent to which these changes could affect your particular corporate structure and the tax payable by your family business, consult with your tax advisor.
— Michael J. Luchenski
ONTARIO REPEALS LAW GOVERNING BUSINESS-ASSET SALES
Ontario’s Bulk Sales Act (the BSA), the law that has governed the sale of the assets of a business outside of the ordinary course in Ontario for the last 100 years, was recently repealed.
The BSA had been in place since 1917, ostensibly to protect the trade creditors of a business when the assets of the business were sold outside of the ordinary course. Absent compliance with the BSA, unpaid trade creditors had the right to void such a sale transaction.
Compliance with the BSA was awkward and often impractical and the consequences of non-compliance potentially punitive. Its existence added unnecessary costs and uncertainty — and often risk for the purchaser — to asset sale transactions. And its application was uneven as it extended neither to the sale of intangible assets nor to share sale transactions.
More modern statues, among them the Personal Property Security Act (Ontario), provide trade creditors with ample protection and in a more efficient manner.
Ontario business lawyers have long advocated for the repeal of the BSA. Ontario finally did so in March of this year, the last Canadian province to do so. The repeal of the BSA removes this unnecessary and often costly hindrance to business asset sales.
— William G. Sirdevan
CHANGES TO AUDIT RULES
As a part of the preparation of audited financial statements, auditors make inquiries of lawyers as to the existence of contingent liabilities — “claims” and “possible claims” — against their mutual client.
What is disclosed on financial statements, and how it is disclosed, is of critical importance both for the client and the third parties who will be relying on them and for the auditors who are asked to provide an audit opinion on the financial statements.
With a view to addressing the two often-conflicting goals of fair financial disclosure and the protection of privileged communication between a client and its lawyers, in 1978, the accounting and legal professions developed a Joint Policy as to how this communication between them would occur. After almost 40 years a new Joint Policy was recently put in place in this respect.
The new Joint Policy now brings in-house counsel into the exercise, recognizing their much greater presence than before, details new communication protocols and timelines between the two professions in this respect and reflects the development of new audit standards and financial reporting frameworks in recent years permitting audit responses to be written in a neutral manner without having to refer to the specific applicable framework.
The new Joint Policy brings current 40-year-old guidelines, and acknowledges many modern realities. As before, however, issues can still arise between client and lawyer as to the evaluation of a claim or possible claim leading to the possibility, absent resolution, where an auditor may have to qualify the audit opinion, a situation that is to be avoided if at all possible.
— William G. Sirdevan