Evidence of meeting #7 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was interest.
A video is available from Parliament.
Conservative
Conservative
Pierre Poilievre Conservative Carleton, ON
The children would then pay tax on the money that they're taking out of the company in order to pay their parents.
Conservative
February 6th, 2020 / 4:05 p.m.
Regional Tax Leader, MNP LLP
That's at the dividend rate. In order for the children to pull a net $2.75 million out of the company, they have to take a dividend of $4.3 million out of that company that's only worth $2.75 million. At the end of the day, if we were to have a sale to a family member today, with no planning at all, there would be effective taxes of $1.8 million to transition this business.
Conservative
Pierre Poilievre Conservative Carleton, ON
Now, in the case where the family sells to the child's corporation, I guess the family would not be entitled to the lifetime capital gains exemption.
Conservative
Pierre Poilievre Conservative Carleton, ON
Why does section 84.1 of the Income Tax Act take away the exemption in the case of a child's corporation buying it versus the child buying it directly?
Regional Tax Leader, MNP LLP
There is a prohibition in the act today that says that if you are trying to sell within a family, if you're trying to use any kind of capital gain exemption or any untaxed form of a gain, like 1971 V-day value, you cannot extract funds out of a corporate group to do that. If we were to—
Conservative
Conservative
Pierre Poilievre Conservative Carleton, ON
Okay. In the first case, it would be taxed as a capital gain. In the second case, it's taxed as a dividend.
Regional Tax Leader, MNP LLP
In the second column there, we actually didn't look at the parents paying a dividend. We said that, with proper planning today, the parents would actually trigger the capital gain first, and then the kid's company could buy the shares. With proper planning today, we can get capital gain rate on the full capital gain, but we can't get any capital gain exemption for anyone.
Conservative
Pierre Poilievre Conservative Carleton, ON
Right, but in the second case, then, the child could pay out of his or her corporation tax-free.
Regional Tax Leader, MNP LLP
The corporation could fund the purchase. Here, it actually costs the corporation $2.75 million now to pay $2.75 million.
Conservative
Pierre Poilievre Conservative Carleton, ON
Okay. In the third case, then, where you sell to a third party, the family gets the capital gains exemption, and the company, the third party, pays no tax on the amounts coming out of that.
Regional Tax Leader, MNP LLP
Right, so we end up with a net tax of under 10% in Ontario today in that same scenario, but in the last column there, as I was showing, what would have happened—
Conservative
Pierre Poilievre Conservative Carleton, ON
Yes, that was the proposal. They seem to have backed off on that. Hopefully, that's gone forever.
Regional Tax Leader, MNP LLP
We would like to just caution, again, that if we take away the capital gain rate and have it all at dividend rates, the consequence would be 101%.
Regional Tax Leader, MNP LLP
We'd have to pull $5.2 million out of a company worth $2.75 million. The math doesn't work.
Conservative