Are you a small business owner wondering how the proposed tax changes may impact you and your business?
When the Liberal government announced the 2017 Federal budget on March 22, 2017, they promised the issuance of a consultation paper by Fall of 2017 which would address “Tax Fairness for the Middle Class”. The Liberal government came through on their promise with the issuance of a consultation paper on July 18, 2017, which contains numerous proposed tax amendments causing great concern for small business owners.
Please note the items discussed below are proposed amendments only and have not been introduced to legislation at this particular point in time. However, if these proposed amendments were passed as legislation, the intended effective date is January 1, 2018 for most, but some may be retroactive to the announcement date of the consultation paper
A Practical Approach
To assist with providing a practical approach to understanding how these proposed changes may impact a small business owner, we have outlined a case scenario below. We hope this will help to better illustrate the changes and quantify the impact.
- The Smith Family, consisting of Parent A, Parent B and 2 Children (Child 1 and Child 2). They own a small business in Nova Scotia called “OPCO”. The Smith’s accountant suggested the use of a family trust when the company was first started;
- OPCO generates $150,000 of annual taxable income;
- Parent A is the principal of OPCO;
- Parent B is a stay at home parent and is not actively involved in OPCO;
- Child 1 is 19, attends university and has no source of income;
- Child 2 is 15;
- Parent A has been offered $1M for the shares of OPCO from an unrelated third party;
Below is an overview of the proposed tax changes along with a practical approach to the impact these changes would have on the above fact set:
Limitation on Income sprinkling
Finance has proposed to limit the ability to "income sprinkle" through the introduction of a reasonableness test which would look towards each family members labour contributions and / or risk exposure to determine their "reasonable allocation limit".
Under the current tax provisions, OPCO would pay $20,250 of corporate tax on its taxable income, leaving $129,750 available for distribution in the form of dividends. To assist with funding Child 1's education, dividends of $20,000 from the trust are allocated to Child 1 and the balance of the dividends are allocated between Parent A and Parent B, being $54,875 each. The combined personal taxes on these dividends total $14,880.
Under the proposed legislation, OPCO would continue to pay the same $20,250 of corporate tax on its taxable income, leaving $129,750 available for distribution in the form of dividends. However, if there were no labour contributions or risk exposure by either Parent B or Child 1, the reasonable allocation limit to each would be NIL, thus all dividends would be taxable to Parent A. The combined personal taxes under this scenario would be $31,863.
You will note the proposed legislation potentially increases personal taxes under this scenario by $16,983, a 114% increase. Now let’s take this one step further. In order for the family to obtain the same after tax personal cash flow, OCPO would need to generate additional taxable income of $34,000, a 23% increase. As business owners, we recognize such a substantial increase is not so easily achieved, but it appears Finance may not fully grasp the economic impact.
Limitations on capital gains exemption multiplication
Finance proposes to limit access to the capital gains exemption through the following three primary methods:
- Inability to claim the capital gains exemption against capital gains accrued prior to the shareholder obtaining age 18;
- Inability to claim the capital gains exemption on any capital gain realized which would not be considered reasonably accrued to that person through their involvement, capital investment, or risk in the business;
- Inability to claim the capital gains exemption against capital gains accrued during a period which the shares were held by a trust;
- NOTE - A special transition election will be required with respect to this change; however, in making the election the capital gain will be triggered and will become reportable;
Under the current tax provisions, if the shares of OPCO were to be sold for $1M, the Trust would recognize a capital gain of $1M. The trust would then allocate the capital gain to beneficiaries Parent A, Parent B and possibly Child 1 and Child 2, allowing each respective beneficiary to shelter the capital gain from tax by using their lifetime capital gains exemption (LCGE). As a result, no personal taxes would be incurred (Ignoring the potential application of alternative minimum tax (AMT)).
Under the proposed legislation, Child 2 would not be eligible to utilize their LCGE to shelter any portion of the capital gain allocated to them as they have not obtained age 18. Secondly, no portion of the capital gain which accrued during the period the shares were held by the trust would be eligible to be sheltered by the LCGE, which would equate to the entire $1M in the above scenario. Assuming each of Parent A, Parent B, Child 1 and Child 2 had no other sources of income and the gain was allocated equally between them, the combined personal taxes associated with the capital gain would be $163,300.
As noted above, the proposed legislation does provide for a special transition election where shares are held by a trust prior to January 1, 2018. However, in making such an election, the elected gain in the shares is triggered and becomes a taxable disposition to the taxpayer. Although the gain may be fully sheltered by the LCGE, AMT may apply which would result in a cash outflow even though no cash has actually been received. Assuming each of Parent A, Parent B, Child 1 and Child 2 had no other sources of income and the gain was allocated equally between them, the combined AMT associated with the capital gain would be $22,200.
You will note the proposed legislation could potentially trigger a prepayment of tax (IE - AMT) related to shares currently held by a trust, but even more concerning is the inability for future gains accrued while the trust owns the shares to qualify for the LCGE. While trusts have been historically used for the purposes of income splitting and multiplication of the capital gains exemption, they have more recently been used as a method to move funds between an Operating Company and a Holding Company. If these proposed changes become enacted legislation, taxpayers may need to decide between access to the LCGE, or the ability to move funds between their Operating Company and Holding Company without incurring large costs.
Finance has proposed various alternatives to increase the corporate tax rate on income used for passive investing. They have not expressed their intended approach but have outlined the following two alternatives:
Under this approach, the portion of income earned in active business that is not reinvested back into an active business (IE - profits from operations not reinvested in assets for the business operations, rather invested in the stock market) would no longer qualify for the small business tax rate of 13.5%. Instead, this income would be subject to the higher general corporate tax rate of 31% initially and the difference between the small business tax rate and the general rate (17.5%) would become refundable only if those funds were subsequently reinvested back into an active business.
To illustrate this, assume of the $150,000 of taxable income generated by OPCO, $100,000 is reinvested back in to the operating business and $50,000 is invested in stocks. Under the current tax system, the entire $150,000 would qualify for the 13.5% small business tax rate and corporate taxes would total $20,250.
Under the proposed legislation, only $100,000 would qualify for the 13.5% small business tax rate and the remaining $50,000 would be subject to the 31% general tax rate. As a result, corporate taxes would total $29,000 for an increase of $8,750. If the $50,000 was subsequently withdrawn from the stock investment and the proceeds were then used towards the active business operations, the additional $8,750 of tax previously paid would be refunded to the corporation in that taxation year.
Related to the above proposed legislation, there are two primary drawbacks to be considered. Firstly, the payment of the general tax rate results in less after tax cash flow being available for investment as the company only retains $69 out of every $100 vs. $86.50 out of every $100. Secondly, if the funds invested are never used towards the active business operations, the excess tax is never refunded, which results in a higher overall tax rate when the funds are eventually paid out to the shareholders as dividends.
Under this approach, the current regime of refundable taxes on passive investment income would be removed from the tax system along with removing the ability for capital gains on passive investments to increase the capital dividend account balance. Although these changes would not impact the ability to invest corporately, they would result in a higher tax cost at the time of liquidating the passive investments.
Under the current tax system, passive investment income attracts an initial tax rate of 54.67%, of which 30.67% becomes refundable on the subsequent payment of dividends. Further, the 50% non-taxable of capital gains from all sources is added to the capital dividend account, which can be paid out to the shareholders on a tax free basis.
Under the proposed legislation, Finance would remove the entire concept of refundable taxes and would no longer allow for the 50% non-taxable portion of capital gains related to passive investments to be added to the capital dividend account. As a result, the corporation would first pay tax of 54.67% on its passive income, which we highlight is equal to the current highest personal tax rate. When the corporation subsequently paid dividends to its shareholders, the respective shareholder would then pay personal taxes on the dividends. To illustrate the impact, consider the following combined rates:
- Current maximum personal tax rate on passive income = 54.00%
- Current maximum personal tax rate on capital gains = 27%
- Current maximum corporate and personal tax rate on passive income earned through a corporation = 59.70%
- Current maximum corporate and personal tax rate on capital gains earned through a corporation = 29.85%
- Proposed combined maximum corporate and personal tax rate on passive income earned through a corporation under the deferred taxation approach = 75.96%
- Proposed combined maximum corporate and personal tax rate on capital gains earned through a corporation under the deferred taxation approach = 61.47%
Finance argues the increased tax rate on passive income under the deferred taxation approach is necessary to adjust for the fact that the corporate investments are made after only paying the 13.5% small business tax rate. However, we wonder if Finance has considered the impact on existing corporations holding passive investments which have become former business owners only source of retirement income. These same former business owners have no ability to retroactively change their investing choices, but yet the increased tax burden could have a significant impact on their ability to preserve income for the duration of their lifetime.
Restriction on Corporately held shares where shares were acquired from related persons (family succession planning)
When an unrelated purchaser acquires shares of a corporation, a common tax planning technique is to have the purchaser incorporate a separate corporation (Holdco) to acquire the shares. The benefit in doing so is that if the purchaser is borrowing funds to purchase the shares, the loan payments related to principal can be paid with after-tax corporate dollars (only 13.5% tax paid) vs. after-tax personal dollars (between 23.87% and 54%). In the event the purchase is funded with the purchaser’s personal funds, the use of Holdco allows them to extract the amount of their investment from Holdco over time without incurring any personal taxes.
The Income Tax Act has a long-standing provision to prevent certain tax benefits achieved through share transactions between related persons. Where a vendor and purchaser are related, the adjusted cost base (ACB) of the purchaser is categorized between "soft ACB" and "hard ACB". The soft ACB is equal to the LCGE claimed by the vendor and the hard ACB is equal to the total ACB less the soft ACB. If the purchaser chooses to transfer the acquired shares to a separate corporation after acquiring them, the aggregate of the non-share consideration received is limited to the hard ACB or a deemed dividend will arise. As a result, if a related purchaser wanted to use a Holdco, the amount of debt the Holdco could assume or value of promissory note the Holdco could issue to the purchaser would be equal to the hard ACB. To simplify, a parent cannot sell his/her shares to a child’s corporation, whether the parent utilized the capital gains exemption or not. However, a parent can sell to an unrelated person’s company and can also utilize the capital gains exemption.
Under the proposed legislation, Finance has suggested that all ACB received as a result of a purchase from a related party will be soft ACB. As a result, if the purchaser chose to transfer the acquired shares to a separate corporation after acquiring them, the receipt of any non-share consideration would result in a deemed dividend.
If these changes are enacted, a related purchaser would no longer be able to use a Holdco for the purposes of repaying debt corporately or extracting cash tax free since no hard ACB exists. Further, we would highlight that this concept of soft ACB only applies to related persons, so if the purchaser were unrelated to the vendor, the entire ACB is considered hard and Holdco could issue non-share consideration (IE - assume debt or issue a promissory note) for the full ACB. As a result, these changes would put a related purchaser at a significant disadvantage, thus greatly impacting the ability to move small businesses down the family line, even in situations where transactions are at fair market value. These amendments further increase the disadvantage to a related buyer and it is difficult to imagine how Finance considers such a change to be bringing fairness to the tax system.
Restriction on planning for deceased taxpayers
When a person passes away, they are deemed to dispose of everything they own for fair market value, which commonly includes shares of private corporations. As a result of this deemed disposition, significant income taxes will often arise. However, the assets of the company which give rise to the capital gain remain assets of the company, thus liquidation of these assets results in potential capital gains inside the company and additional taxes at the personal level when paid out to the beneficiaries of the estate in the form of dividend income. This situation is often referred to as double taxation.
There is currently an alleviating provision where the assets of the company are liquidated within the first taxation year of the estate, resulting in dividends being paid to estate. In this case, a capital loss arises on the shares which is carried back to offset the capital gain resulting from the deemed disposition, thus bringing the tax on the deemed disposition to NIL. As a result, the only tax paid is the tax on the dividends to the estate.
Another common method is referred to as the "pipeline". To accomplish the pipeline, the estate completes various transactions which ultimately result in a promissory note (equal to the fair market value of the shares of the company at the time of the deceased taxpayers passing) being due to from the company to the estate. As a result, cash of the company equal to the promissory note can be paid to the estate on a tax free basis over a period of time, meaning the total tax payable on the assets of the company which existed at the time of passing is the tax on the capital gain. Since the current tax rates on capital gains are lower than current tax rates on dividends, the pipeline will generally result in less taxes being paid overall.
If the proposed legislation were enacted, the pipeline transaction would no longer be available, meaning the only method of mitigating double taxation would be to liquidate the assets of the company within the first taxation year of the estate. Although this may seem like a viable option, it often takes much longer than the first taxation year of the estate to liquidate the assets of the company. In the event the assets are not liquidated within the first year, double taxation would result. Given the Income Tax Act is generally drafted to prevent double taxation; it is difficult to comprehend how Finance considers these amendments good tax policy.
Although the above proposed amendments are concerning for the small business community, we feel it is currently too early to act given the uncertainty as to whether or not these amendments will pass as legislation. However, we can assure you that we will be monitoring this matter closely and will provide updates as new information becomes available.
As the above proposed amendments form part of a consultation paper, Finance has stated they will continue to accept responses to the paper until October 2017. In conjunction with our fellow AC Group firms, we will be preparing a response to Finance outlining our concerns with respect to these proposed amendments.
We encourage you to write to your local MP, or to the Minister of Finance, to express concerns on the impact this will have on you and your family. As we understand drafting such communications can take a substantial amount of time, we have attached an example of a letter which could be sent along to your local MP, an electronic copy of which can be found on our website (www.bvca.ca).
In the event you wish to review the more technical aspects of these proposed amendments to the Income Tax Act, we attach our interpretation of the draft legislation being proposed.
Paul MacNeil, CPA CMA CBV
Partner – Tax & Business Valuation
Belliveau Veinotte Inc.
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DEPARTMENT OF FINANCE – PROPOSED TAX AMMENDMENTS (JULY 18, 2017)
Please note the below items are proposed amendments only and have not been introduced to legislation at this particular point in time. However, if these proposed amendments were passed as legislation, the intended effective date is January 1, 2018 for most, but some may be retroactive to the announcement date of the consultation paper
The concept of income sprinkling is essentially the ability for a small business owner to pay a portion of the after-tax business profits to family members in the form of dividends. Income sprinkling is commonly accomplished by using a family / business trust or issuing shares directly from the corporation to each respective family member. It has been a long-standing tax position that dividends can be paid solely because of share ownership. Therefore, the respective family members receiving dividends were not required to be involved in the business whatsoever nor were they required to be employed by the business.
The consultation paper proposes to introduce a reasonability test for dividends paid to persons who are related to the principal of the corporation (IE – spouse and children). The proposed reasonability test would be based on the following two primary concepts:
- Engagement in the business – This would be a test similar to paying salary or wages to a related person. Essentially, the maximum amount which would be considered reasonable would be the amount which would paid to an unrelated person to complete the same duties. Further, it is important to note that the amount of reasonable dividends determined under this concept would be the maximum threshold less salary or wages already paid.
- Example - Assume Bob works in his father’s small business and a market rate salary for his job would be $100,000, but Bob only receives a salary of $60,000. Although, the maximum reasonable amount would be $100,000, the maximum reasonable dividends would be $40,000 (being $100,000 less the $60,000 salary already paid).
- Capital invested in the business / assumed risk in the business – The reasonable amount under this concept would in theory be the amount which would be paid to an unrelated person based on their investment in the business, or the risk they’ve assumed with respect to the business.
- Example – Assume Bob has $100,000 invested in his father’s business and a market rate of return for a similar type of investment is 10%. The maximum “reasonable amount” would be $10,000 (being $100,000 x 10%).
Since a reasonability test for salaries and wages to related persons has always existed, there is a general understanding of how the first concept would be addressed. However, the second concept requires a great deal of judgement for a variety of reasons. Firstly, the capital invested in a small business by persons related to the principal often constitutes capital which could not be received from a traditional lender (IE – bank). Therefore, market rate of returns for similar investments are not readily available. Secondly, the risks assumed by persons related to the principal (IE – often a spouse) can be substantial (IE – personal guarantees, etc.) and reasonable compensation for taking such risk could vary greatly. Unfortunately, the consultation paper is vague on how these reasonable amounts would be determined, causing a great deal of concern.
So what happens if the reasonable amount is exceeded? The proposed amendments provide for ensuring any dividends exceeding the reasonable amount be considered “split income”, which has historically been more commonly referred to as the “kiddie tax”. Essentially, all “split income” is taxed in the recipient hands at the top marginal tax rate (Nova Scotia - currently 46.97% and 41.58% for ineligible and eligible dividends, respectively). Therefore, any dividends received which exceeded the reasonable test would be taxed at these top marginal tax rate, essentially removing all tax benefits achieved through income sprinkling.
Multiplication of the Lifetime Capital Gains Exemption
Since the introduction of the lifetime capital gains exemption (LCGE) in 1987, it has been customary tax planning for small business owners to plan for maximizing the benefit of the LCGE. The most common approach has been through the use of a family / business trust owning the common of the shares. This would allow the capital gain realized on the eventual sale of the business to become income to the trust, which in turn could allocate the capital gain among the beneficiaries of the trust (IE – principal, spouse, and children). The net result being access to multiple LCGE’s. The consultation paper proposes the following tax amendments to limit the ability to multiply the capital gains exemption:
- Age limit – Capital gains realized, or accrued, during years prior to a person obtaining age 18 would no longer qualify for the LCGE
- Example – Assume Jim, age 20, sells shares of his father’s company for $1,000,000 and these shares have an adjusted cost base of $1,000. On January 1st of the year in which Jim turned 18, these same shares had a fair market value of $800,000. The gain accrued since Jim reached age 18 ($200,000) would continue to be eligible for the LCGE, but the gain accrued prior to Jim reaching age 18 ($799,000) would no longer be eligible.
- Reasonableness test – The proposed reasonableness test for capital gains would be like the reasonableness test for dividends as discussed above. Essentially, any capital gain realized which would not be considered reasonably accrued to that person through their involvement, capital investment, or risk in the business would be deemed split income. In addition to such amounts above the reasonable amount not being eligible for the LCGE, such amounts would also be taxed as split income at the top marginal rate (currently 54% of the taxable gain in Nova Scotia)
- Exclude gains accrued while shares held by trust – The third proposed amendment is to eliminate the ability to claim the LCGE on capital gains accrued during a period the shares were held by a trust.
- Example 1 – Assume a family trust sells its common shares of its company (Opco) for $1M, which were originally acquired for $1,000; therefore, realizing a gross capital gain of $999,000. Although the family trust continues to have the ability to allocate the gain to its beneficiaries at the discretion of the trustees, the beneficiaries will not be entitled to claim the LCGE to offset the resulting taxable income.
- Example 2 – Assume the same fact set as Example 1, except that the trust distributes the shares of Opco to the beneficiaries of the trust prior to the sale, and then the beneficiaries sell the shares. Based on the proposed amendment, the capital gain would still not qualify for the LCGE as the gain being realized by the beneficiary was accrued during a period the trust owned the shares.
Although each of the three proposed amendments cause concern, the third is perhaps the most concerning of all as it would eliminate one of the largest tax benefits for using a trust. The consultation paper does provide transitional relief whereby an election could be made during 2018 to trigger a portion of the gain accrued in shares during the time they were owned by the trust. However, electing to trigger the capital gain in the shares could presumably also result in the application of alternative minimum tax (IE – prepayment of tax), which could create a cash flow issue given a balance would become due even though no cash is being received as there is no sale.
Passive Investments Inside Corporations
Due to the gap in corporate and personal tax rates, a common tax planning strategy is to transfer the surplus cash flow generated by Opco to a separate corporation, commonly referred to as a Holdco, for investment inside Holdco. Assuming Opco has profits less than $500,000, the corporate tax rate in Nova Scotia is currently 13%, meaning the company retains $87 of every $100 of profit generated. Finance argues this provides small business owners with an unfair advantage over other taxpayers on the basis other taxpayers can only invest limited amounts without first incurring personal taxes on the income. For example, other taxpayers are limited to the amount they can contribute to their RRSP (18% of the prior year income to a maximum of $26,010; however, a business owner is basically unlimited in the amount they can invest corporately. As a result, Finance is proposing the following alternatives to aid in creating a “fair” tax environment. Please note each of these alternatives are independent from one another (IE – only one would be implement, not a combination of both):
- Refundable tax on funds used to acquire passive assets – This proposed amendment would ensure that any funds used to purchase passive assets (IE – investments) would initially not qualify for the small business limit tax rate (currently 13% in Nova Scotia). Rather, it would attract tax equal to the general corporate tax rate (currently 31% in Nova Scotia). The difference between the two rates would only be refunded to the company if the funds were subsequently reinvested in active business assets or distributed to personal shareholders. These changes would essentially result in a reduced ability to invest funds corporately.
- Deferred taxation – Under the current regime, the passive income tax rate for corporations is 54.67% and 30.67% of this is refundable upon payment of a subsequent dividend. Further, the 50% non-taxable portion of capital gains is added to the capital dividend account (CDA) and can be paid out to the shareholders as a tax-free capital dividend. This proposed amendment would alter this current regime so that no portion of the Part 1 tax would be refundable and the 50% non-taxable portion of the capital gain on passive investments would no longer add to the CDA.
Restriction on Corporately held shares where shares were acquired from related persons
Due to the increased difference between tax rates on capital gains vs. tax rates on dividends, Finance is concerned that related persons are biased to engage in transactions with different terms than they would with an unrelated person; therefore, obtaining a benefit as a result. Section 84.1 of the Income Tax Act (Canada) has been a long-standing provision to ensure certain transactions between related persons do not allow for adjusted cost base (ACB) created as a result of a capital gain sheltered by use of a related persons lifetime capital gains exemption (LCGE) to be extracted from another corporation on a tax free basis. The current application of Section 84.1 is illustrated below.
Assume a parent owns the common shares of a Qualified Small Business Corporation (QSBC) with an ACB of NIL and sells those shares to their child for fair market value consideration of $2M. In order to fund the purchase, the child receives a bank loan of $1.8M and uses $200,000 of their personal savings. As a result of the sale, the parent has a capital gain of $2M, of which $824,000 is sheltered by the LCGE and 50% of the remaining $1.176M gain is included in the parent’s taxable income. Under the current application of Section 84.1, the child would have total ACB of $2M, but the portion of this total ACB sheltered by the parents LCGE ($824,000) would be considered "soft" ACB and only the remaining portion ($1.176M) would be considered "hard" ACB.
To minimize the burden of debt repayment to the child (IE - repay the debt with after tax corporate dollars vs. after tax personal dollars, thus alleviating the personal taxes), it would be common practice to have the child transfer the shares to a Holding company (Holdco) and have Holdco assume the $1.8M of debt. Under the current application of Section 84.1, if the amount of non-share consideration (IE - debt) exceeds the "hard" ACB of the shares, the child would be deemed to receive a taxable dividend equal to the excess. To ensure a deemed dividend would not apply, Holdco would only be able to assume debt equal to the "hard" ACB of $1.176M and would issue preferred shares with a redemption value equal to the "soft" ACB of $824,000 for the remaining value. As a result, the child would continue to hold $624,000 of debt personally, meaning it would be necessary for the child to receive taxable income from the company (IE - salary or dividends) on an annual basis in order to make the loan payments.
It is important to note that the current application of Section 84.1 and the concept of "soft" ACB only applies to transactions between related persons. Therefore, if the parent in the above illustration sold the shares to an unrelated person as opposed to their child, the purchaser would receive "hard" ACB for the full $2M purchase price and Holdco would be able to assume the full $1.8M of debt plus issue a promissory note to the purchaser for $200,000. As a result, the current application of Section 84.1 results in a disadvantage to a related buyer, even if the transaction is at market terms.
However, Finance is of the opinion the current regime provides opportunity for family groups to convert dividends into capital gains and is proposing to amend Section 84.1 so that all ACB generated through a transaction with a related person would become "soft", not just the portion sheltered by the LCGE. Assuming the same facts as the above example, this amendment would result in the child having "soft" ACB equal to the full $2M and "hard" ACB of NIL. As a result, Holdco would be unable to assume any portion of the debt, meaning the child would be required to receive an even larger amount of taxable income from the company to allow them to repay the debt.
Restriction on planning for deceased taxpayers
The proposed amendments to Section 84.1 also cause significant adverse consequences with respect to planning for deceased individuals who held shares in private corporations (the "shares") at the time of their passing. As a result of a person passing, they are deemed to have disposed of these shares at fair market value (FMV), resulting in a taxable capital gain (assume the gain is not sheltered by the LCGE for the purposes of this illustration). As a result of this gain, the deceased taxpayers estate receives ACB in these shares equal to the FMV at the time of their passing.
Under the current application of Section 84.1, there is a planning technique commonly referred to as the "pipeline", whereby the estate can complete various transactions which ultimately result in a promissory note (equal to the estates ACB in the shares) being due to the estate by the company. As a result, cash of the company equal to the promissory note can be paid to the estate on a tax free basis over a period of time, meaning the total tax payable on the assets of the company which existed at the time of passing is the tax on the capital gain.
Under the proposed amendments to Section 84.1, the "pipeline" plan would no longer be available. As a result, the only remaining opportunity would be to liquidate all of the assets of the company within the first taxation year of the estate via payment of dividends. This would result in a capital loss on the shares to the estate, which can be carried back to the final tax return of the deceased taxpayer and offset the capital gain. As a result, the total tax payable on the assets of the company which existed at the time of passing is the tax on the dividends.
However, in many cases, it is unlikely that all of the assets of the company could be liquidated that quickly, meaning the loss carry back planning would not available. When the assets of the company are eventually liquidated, the estate would deemed to receive a dividend. As a result, double taxation occurs as there was tax paid on the capital gain at the time of passing plus tax would be paid on the dividends which is a distribution of the same assets.