Tax Reform – What's next for Small Businesses?

Back in July, the Liberal government issued draft legislation for proposed tax reforms aimed at private incorporated businesses that fell primarily into 4 categories: Income splitting, Capital gains exemption, Capital gains within a corporate group, and Deferral of tax using private corporations. These contentious tax reform proposals would not only impact the “rich doctors” as the Feds messaging pushed, but will have a greater impact of hurting small businesses, which make up 98% of the businesses across Canada.

A few weeks ago, Trudeau and Morneau kicked off a series of tax announcements to share the Liberal’s final position on the proposed changes following the anger and outcry from the business community. The Liberal government has decided to abandon the proposed changes to the capital gains exemption but will move forward with a modified version of income splitting or “sprinkling” which will require business owners to prove that they are splitting their income with family members who “meaningfully contribute” to the business. It remains to be seen how businesses will need to prove this.

Proposed rules to discourage using corporations for passive investing will move forward with a new threshold. The government intends to allow incorporated businesses to generate up to $50,000 a year in future passive-investment income that would not be subject to a new tax. However, it is unclear how future gains on currently held investments, typically generated for example through dividend payments or interest, will be treated. Although Morneau believes that small businesses will not be impacted by this measure since 85% of small businesses have no passive investment income at all, he is overlooking an important consideration that this threshold may be too low to help small companies save to grow and to create more opportunities. There could be a looming bigger issue down the road as a result.

Lastly, the Trudeau government is abandoning the proposed tax reform that would have restricted the conversion of income into capital gains. This initial tax proposal change caused a huge concern for farmers and fishers as it would have made it more difficult for farmers and other business owners to pass on their businesses to their children.

The feds have tried to sweeten the deal by slashing the small business tax rate from 10.5% to 9% by January 1, 2019. But, is keeping their 2015 election campaign promise enough for small businesses to happily jump on the bandwagon and to move forward with these changes? If you have not already done so, we recommend that you contact your Accountant to see if you and your business may be impacted by these changes. Please also feel free to reach out to us if you require any corporate changes following these announcements.

Michelle Eames, LLB, LLM
meames@staging.andriessen.ca

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