In mid-July 2017, the federal Liberal Party announced tax changes aimed at ‘improving fairness in the tax system by closing loopholes and addressing tax planning strategies.’ This plan consists of: a middle class tax cut affecting roughly nine million people; a new Canada Child Benefit to alleviate child poverty; legislative action to ‘enhance the integrity of Canada’s tax system’; and, renewed investment in the Canada Revenue Agency’s efforts to improve upon tax compliance measures.
Since the government’s announcement, professionals, tax planners and business lawyers have been debating the potential negative impacts of the proposed changes upon Canadian businesses. The plan contains several items that could affect business owners, including restrictions on income sprinkling and capital gains.
Business lawyers in Ontario are familiar with this common tactic employed by business owners to reduce their family’s tax burden. It involves paying a salary or wage to lower-earning family members, who may or may not work for the company, in order to divert some of the business owner’s income. According to the Department of Finance, this approach is currently employed by roughly 50,000 Canadian families.
The proposed changes would apply a reasonableness test to determine whether adult children are actually contributing to the business. It remains to be determined whether this test can be properly applied to the circumstances at hand.
The Liberals’ proposed restrictions on income sprinkling could have an acute impact on farmers, who suggest that the test simply doesn’t work as against the reality of running a farm family business. The Canadian Taxpayers’ Federation also criticized the new rule as a “small biz tax hike.”
Capital gains consist of profits above the price of acquisition accrued from the sale of stocks, securities, or real property. According to CTV, businesses sometimes convert their income into capital gains to take advantage of the lower tax rate applied to these assets.
“Business owners can currently take out the retained earnings of a corporation and sell some shares to a holding company, where the earnings don’t get taxed,” CTVNews.ca’s Sonja Puzic explained in a recent article. “Under the proposed changes, accessing those assets would result in immediate taxation, which some business owners say will make growing a company and planning for retirement difficult.”
Changes to the changes?
On October 3, Finance Minister Bill Morneau admitted that the government’s tax proposal will need tweaking before moving forward.
“Changes are going to be required – as we move forward we will have more information on timing,” he told the CBC. “For those pieces of legislation that we’ve already drafted, we’ll take into account what people have told us to determine how we go forward from here.”
If you have any questions or concerns about these recent changes to federal tax laws and how they may affect your business, feel free to contact the business lawyers at Nanda & Associates today to help you prepare accordingly.