On July 18 the Federal Government released a white paper containing alarming changes to the way Canadian businesses are taxed. We are very concerned about what the impacts will be on our members and the small business community.
Proposed changes include:
- Sprinkling income using private corporations: The government wants to tighten rules to prevent a business owner from unfairly transferring income to family members who are subject to lower personal tax rates. In certain circumstances, owners would have to demonstrate that wages and dividend payments are “reasonable.”
- Multiplying the Capital Gains Exemption: When an individual sells a small business, the first $830,000 of capital gain is exempt from taxes. The government wants to prevent tax planning structures that enable multiple family members to use their exemptions.
- Reducing the tax deferral advantage on portfolio investment inside a corporation: Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates (which are generally much lower than personal rates). The owner defers paying personal income or dividend taxes until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
- Converting a private corporation’s regular income into capital gains: Income is normally paid out of a private corporation in the form of salary or dividends that are taxed at the owner’s personal income tax rate. In contrast, when a business is sold, it is taxed as a capital gain, where only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains. The government wants to tighten the rules to prevent certain tax planning structures, but it is open to more favourable treatment for genuine family business transfers.
“We will consider the gender impacts of the decisions we make,” the Liberal platform promised. “Public policies affect women and men in different ways.” Minister Morneau
The Proposed Changes Threaten Small Business
The St. John’s Board of Trade is particularly concerned with:
- The tone of the document, implying entrepreneurs do not pay their fair share in tax
- Comparing entrepreneurs to employees
- Inadequate timelines for stakeholders to provide wholesome feedback
- The cost of compliance for business owners
- Unintended victims of the legislation
“We need middle class Canadians to have money in their pockets to save, invest, and grow the economy – to bring back fairness and to strengthen the heart of the Canadian economy.” Prime Minister Justin Trudeau
VIEWPOINT: MEANINGFUL QUESTIONS THAT MUST BE ANSWERED BEFORE TAX REFORM FOR PRIVATE CORPORATIONS IS IMPLEMENTED, Author Karen Stilwell, Tax Partner, Connors Stilwell Tax-Viewpoint-1