Converting a private corporationâ€™s income into capital gains
Anti-surplus stripping rules
Changes are proposed to prevent individual taxpayers from using non-armâ€™s-length transactions that increase the cost base of shares of a corporation and avoid the application of Section 84.1. Section 84.1 is intended to prevent corporate surplus from being removed at the lower capital gains tax rates instead of the higher dividend tax rates where an individual sells shares of the corporation to a non-armâ€™s- length corporation.
The government is proposing a review of tax planning strategies in three areas:
- Income sprinkling using private corporations
- Converting a private corporationâ€™s income into capital gains
- Holding a passive investment portfolio inside a private corporation
Since 1971, Canadians have been taxed on the gain realized when capital assets â€“ real estate, stocks and mutual funds and other investments â€“ are sold. There are a few exceptions, and the one we are most familiar with is the sale of a residence.
The sale of a â€œprincipal residenceâ€ is specifically exempted from tax in the Income Tax Act. Here are a few things to keep in mind when selling your home or vacation property: