Federal Tax Changes: 8/9/2017

UPDATE:  Aug 25, 2017
If your business is incorporated, then you could be facing a larger tax bill and big compliance costs from the government’s new proposals to change the way corporations are taxed.
Here are three things you need to know about the tax changes proposed by the federal government:

1. Do you employ family members? The government wants to scrutinize their compensation to apply a much higher tax rate on income they consider “unreasonable”.  
2.  Do you invest the profits from your business? The federal government is proposing to tax that income at an effective rate of 70%.  
3. Do you want to pass your business on to your children? Tough new rules make it difficult for younger kids to get the capital gains exemption. They could be double-taxed. 

The proposed tax reforms announced by the government are going to place an extra burden on many SME's and are damaging to businesses that form the backbone of Canadian communities.

Between 85 - 90% of business in Canada is small and medium-sized and nearly 50% are incorporated.  It is not only large companies that are incorporated and this tax reform will be harmful to all business.

Write to your Member of Parliament (Prince George - Peace River Northern Rockies - The Honourable Bob Zimmer)  
Write to the Federal Finance Minister (Minister of Finance, The Honourable William Francis Morneau)

Sample letter from the Canadian Chamber available here.

August 9, 2017

The Canadian Chamber issued the following Policy Alert and in discussion with other Chambers we believe there could be impacts on most businesses.  We will be investigating further and submitting comments to Finance Canada.  If you have any comments or feedback you would like to provide directly please contact the Chamber office, the Canadian Chamber or Finance Canada directly at the links below.  The deadline for comments to Finance Canada is October 2, 2017


Policy Alert: Finance Canada Is Considering Major Changes to How Corporations Are Taxed

The Department of Finance Canada is considering major changes to how corporations are taxed. The proposed rules could have a significant impact on many Canadian businesses: potentially raising taxes, increasing the administrative burden on SMEs and heightening the impact on family-run businesses. 

On July 18, Finance Canada launched a consultation on how “tax-planning strategies involving corporations are being used to gain unfair tax advantages.” The document contains proposed policies to close these “loopholes.” There are four key changes that will affect business:

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 $850,000 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.

The Canadian Chamber of Commerce and its Taxation Committee are currently studying how the proposed changes will affect members in different industries, in family businesses and those with different ownership structures. We will be submitting recommendations to Finance Canada. 
 
Should you wish to participate or provide input, please email Hendrik Brakel. (hbrakel@chamber.ca)

In particular, we are looking for detailed examples and cases of how a specific small business will be affected by the changes. We feel concrete examples will be most effective in making our case for easing the changes. We would ask that you send them to us by August 11. 

Click here to view the consultation documents released by Finance Canada.