Around the world, countries continue to confront the magnitude of their post-pandemic debt and its impact on their economies. The path to robust, sustainable growth can be elusive, so it is not surprising to find governments on the hunt for new sources of revenue—with changes in taxation at the top of that agenda.
Canada is no exception. New taxes have been introduced on luxury goods such as airplanes, high-end cars and boats, as well as federal and municipal “underused housing” taxes, which affect primarily foreign owners of Canadian residential properties. One of the most significant changes of late has been to the Alternative Minimum Tax (AMT).
First introduced in 1986, the AMT is a parallel tax calculation that limits certain deductions, exemptions and credits that would otherwise apply to individuals and certain trusts under the regular tax rules in Canada. In the 2023 federal budget, the government announced an overhaul of the AMT in a bid to ensure high-income earners pay at least a minimum amount of tax. These changes are expected to come into effect on January 1, 2024. They include an increase in the AMT rate from 15 per cent to 20.5 per cent, changes to the treatment of capital gains for the AMT, and limits to a broad range of deductions and credits that would otherwise apply under the regular tax rules.
Two steps at a time
Legislation has been proposed regarding the Canadian tax treatment of passive (and certain active business) income earned by Canadian controlled private corporations (CCPCs) and substantive CCPCs through controlled foreign affiliates.
These proposals are designed to increase the effective corporate tax rate on certain income from controlled foreign affiliates to approximate the highest combined personal tax rate of individual Canadian residents. In Ontario, for example, the effective tax rate of a high-net-worth individual is currently 53.53 per cent. The new framework is expected to raise the CCPC corporate tax rate on such targeted income to approximately that level. Since the earnings would bear this high rate of taxation at the corporate level prior to distribution, the rules are designed to ensure that no significant additional tax would arise on subsequent distribution of such earnings to the individual Canadian shareholders. As such, the rules are meant to function solely as an anti-deferral mechanism.
These rules have not yet been enacted, but they are proposed to apply to tax years beginning on or after April 7, 2022. Understanding the impact of these changes will be crucial for immediate and effective tax planning. This is particularly true for large private companies and ultra-high-net-worth families that have customarily invested in real estate properties through controlled foreign affiliates in the US and other parts of the world.
At the same time, we should recognize that these and other transformative shifts in the tax terrain do not stop at Canada’s borders.
We live and operate in an increasingly global environment, and many of my clients in Canada are actively exploring opportunities and managing their risk by expanding their businesses and investing their capital internationally. That makes it more important than ever for business owners to continually monitor the changes that are being introduced across the world and to seek professional advice to proactively manage their affairs.
Globe trotting
Greater international government collaboration on tax rules is furthering the evolution of Canadian and global tax policy. The OECD/G20 Inclusive Framework on Base Erosion Profit Shifting (BEPS) is driving reforms to the international tax system to make the rules more coherent and transparent.
Multilateral progress continues on what has become the BEPS Two-Pillar Solution. Pillar One proposes to reallocate certain amounts of taxable income earned by large corporations to the jurisdictions where their customers are located. In the absence of a multilateral agreement on Pillar One, Canada plans to introduce new Digital Services Tax measures as of January 1, 2024. Pillar Two provides a new global minimum tax regime, subjecting the profits of large, multinational businesses to a minimum 15 per cent tax on income from every jurisdiction in which they operate. Canada is moving ahead with legislation to implement the Pillar Two global minimum tax, starting at the end of 2023.
So far, most of the new international taxation rules involve large multinational enterprises; however, large privately-owned businesses and family offices may find themselves subject to other significant changes that are proposed in Canada. Among these are the new limits on the deductibility of interest and financing expenses under the “EIFEL” regime and the introduction of more extensive mandatory disclosure requirements.
In addition to these complex tax measures, many families are navigating other important transitions such as the intergenerational transfer of their businesses and their wealth. The recently released KPMG Family Office report offers further insights into why this is an increasingly relevant and important concern.
Once again, taxation will be a key consideration for these transfers, which promise to be the largest transition of wealth in financial history. As my colleague Yannick Archambault pointed out in a KPMG in Canada blog post, successful individuals and their families often find that managing the complexities of their wealth becomes a business unto itself. As Yannick describes, family offices have risen to become their own kind of “ecosystem” that must manage the increasing complexity of globalization and multi-jurisdictional regulations for their multi-generational, geographically dispersed families.
In Canada, proposed new tax rules that deal with the intergenerational transfer of a family business are set to take effect (along with many other tax changes globally) on January 1, 2024. As my colleague Dino Infanti explains, the prospect of these new rules already has many family business owners carefully considering the most tax-effective options for transitioning the shares in their companies to the next generation.
Striding to the challenge
The global and domestic tax terrain will undoubtedly continue to shift. These changes will require you and your family members to ensure you continue to be compliant with changing tax laws in every jurisdiction where your business operates, where you hold investments, and where family members reside. Staying up to date on your current tax situation, the taxation of the next generation, and the latest tax rules will be complex—and perhaps even overwhelming at times. You will need to stay abreast of all relevant developments and take the time to understand their nuances and subtleties. It is complex, and you should expect some turbulence. But if you keep your feet on the ground, both your business and your family will manage fine.
Learn more about how KPMG Family Office can help ensure all the moving parts of your business, personal and financial needs are aligned—from navigating life changes and reaching milestones to facing the future with confidence.
