The proposed tax law changes announced by the Minister of Finance on July 18, 2017 came as a shock to our industry. It will be, if fully enacted, the biggest tax change since the Income Tax Act was overhauled in 1972. All tax planning pertaining to small Canadian businesses will drastically change under the new proposed legislation.
The last few years have seen other major tax law changes that may have affected your business, which has resulted in additional costs to prepare and file corporate tax returns:
- April 20, 2015 – Paying Intercorporate Dividends and the calculation of Safe Income on Hand
- March 22, 2016 – Multiplication of the Small Business Deduction – certain partnership and corporate structures must now share the $500,000 small business deduction
The July 18, 2017 proposed tax changes are punitive, potentially creating double taxation and disincentive for entrepreneurs to invest in and grow their small business corporation. Long gone will be the common estate planning transactions that were available under the old regime. The proposed changes are very complex and unique to everyone’s corporate situation.
Here is a summary of how some of the proposed changes will impact you:
- Income Splitting: Any Canadian resident who receives income and/or dividends from a related business, unless the income is “reasonable in the circumstances”, would be subject to tax at the highest marginal rate of tax (called Tax on Split Income (“TOSI”))
- Passive Income earned in a holding company will be taxed at significantly higher rates – 64.07%
- Succession planning: the proposed changes will add 20% more tax to a small business owner who sells the business to a family member versus selling to someone at arm’s length
- Additions to the capital dividend account of a corporation will be denied when the gain arose on the disposition of passive investments
- The Lifetime Capital Gains Exemption (“LCGE”) on qualifying shares would be limited to only those individuals who are actively involved in the business (children/spouses who own shares of your small business, directly or indirectly through a family trust would not be entitled to the full LCGE)
- Owning small business shares upon your death could result in double taxation at a rate of 81.22%
- Additional accounting and legal fees to properly plan for the proposed changes
Although the consultation period is ending October 2nd, 2017, CPA Canada and the Canadian Tax Foundation have submitted very detailed recommendations to the Ministry of Finance. In discussion with the Ministry of Finance yesterday during a live Webcast, the Ministry has confirmed that they are considering the recommendations put forward.
We are also working with industry specialists to determine any tax planning opportunities on how these proposed tax law changes will impact you and your company. Until more is known, we cannot advise on any strategies but will keep you informed as we learn more of the upcoming changes.
If you have any questions or concerns, please feel free to contact me or any of my team.