LTC entry tax Option 1: The entry tax formula Promotes equity by addressing the tax advantage which is Requires legislative changes. should be amended to change the currently only available to shareholders whose personal tax rate Should the entry tax formula be tax rate that applies to any income exceeds 28% (those on the 30% or 33% marginal tax rate). amended to change the tax rate calculated by the adjustment, to Equally addresses the tax disadvantage for shareholders with that applies to any income the LTC shareholder’s personal personal tax rates below 28%. calculated by the adjustment? tax rates. Creates certainty and reduces enforcement costs, by preventing the potential for avoidance of tax by cashed up companies who elect into the LTC regime and then subsequently liquidate. Gives rise to a small fiscal gain. Option 2: The entry tax formula No legislative change is required. Does not address the potential over or under-taxation of should not be amended to change shareholders (depending on their personal tax rates) which the tax rate that applies to any the current formula causes. income calculated by the adjustment (status quo). Does not resolve uncertainty over when a company that elects into the LTC regime and then subsequently liquidates, will be challenged on tax avoidance grounds. Does not reduce enforcement costs associated with disputes on whether a company that elects into the LTC regime and then subsequently liquidates is guilty of tax avoidance. Option 1: Debt remission income Addresses the current over-taxation in the hands of the owner Requires legislative changes. Debt remission in LTC context: should not arise for the who remitted the debt. shareholder-creditor when the When a shareholder loans debt is forgiven. Is conceptually more than allowing the bad debt deduction, money to their LTC and the given that the deduction represents a capital loss. debt is subsequently forgiven; should debt remission income
LTC entry tax Should the entry tax formula be amended to change the tax rate that applies to any income calculated by the adjustment? Option 1: The entry tax formula should be amended to change the tax rate that applies to any income calculated by the adjustment, to the LTC shareholder’s personal tax rates. Promotes equity by addressing the tax advantage which is currently only available to shareholders whose personal tax rate exceeds 28% (those on the 30% or 33% marginal tax rate). Equally addresses the tax disadvantage for shareholders with personal tax rates below 28%. Creates certainty and reduces enforcement costs, by preventing the potential for avoidance of tax by cashed up companies who elect into the LTC regime and then subsequently liquidate. Gives rise to a small fiscal gain. Requires legislative changes. Option 2: The entry tax formula should not be amended to change the tax rate that applies to any income calculated by the adjustment (status quo). No legislative change is required. Does not address the potential over or under-taxation of shareholders (depending on their personal tax rates) which the current formula causes. Does not resolve uncertainty over when a company that elects into the LTC regime and then subsequently liquidates, will be challenged on tax avoidance grounds. Does not reduce enforcement costs associated with disputes on whether a company that elects into the LTC regime and then subsequently liquidates is guilty of tax avoidance. Debt remission in LTC context: When a shareholder loans money to their LTC and the debt is subsequently forgiven; should debt remission income Option 1: Debt remission income should not arise for the shareholder-creditor when the debt is forgiven. Addresses the current over-taxation in the hands of the owner who remitted the debt. Is conceptually more than allowing the bad debt deduction, given that the deduction represents a capital loss. Requires legislative changes.
2016-ris-archcrm-bill-11.docx