To Our Clients:
As many of you are aware, the Federal Liberal Government has recently announced their “Fair Tax Plan” to implement changes to the Income Tax Act which will effectively destroy tax planning as we know it.
The proposed changes will impact every small business and investment corporation. The changes are an attempt to close what have been characterized by the government and media as “loopholes” and “accounting tricks”. It is an attempt to ensure that small business owners receive no tax advantages over employees, ignoring the financial risks and sacrifices associated with business ownership. Small businesses do not have guaranteed pension plans, health benefits, vacation pay, Employment Insurance protection, paid parental leave, etc. Of the 11.6 million Canadians employed in the private sector, 8.2 million are employed by small businesses.
We are providing a brief summary of the proposed changes.
The government is proposing to extend the tax on split income to dividends paid to adult family members not active in the business. In addition, they are proposing to introduce a “reasonableness test” to dividends paid to adult family members who are active in the business. The effect of the tax on split income would be to tax these dividends at the top personal rate.
Lifetime Capital Gain Exemption:
Since 1983, each individual has been eligible for a tax free capital gain on “Qualified Small Business Corporation Shares”. The current exemption is approximately $836,000. The proposed changes restrict this exemption to individuals who are over 18, actively engaged in the business, and hold the shares directly (i.e. not through a Trust). They are also proposing to introduce a reasonableness test here as well. Effectively, these measures will eliminate the ability to multiply the capital gains exemption with family members.
Holding companies have been used to leave excess funds in a corporation for investment purposes. The effective tax rate on investment income is 50.17%, not the 15% that has been reported in the media. The proposed changes, which are incredibly complex, would effectively tax investment income earned by a corporation at 73%. We currently have a system of rules to ensure that personal and corporate rates are integrated, whereby there is no tax rate advantage to investing through a corporation.
As mentioned, this is a brief summary of the largest proposed change to the Income Tax Act since 1972. We believe that these changes are anything but “fair” and are an attack on small businesses. We are working with our association to put forward a submission before the expiration of the feedback deadline of October 2, 2017.
We are encouraging our clients to contact their associations and Members of Parliament to voice their opinion on these proposed changes.
Here are the local MP’s. If you are outside of these areas, please click here: www.ourcommons.ca.
Kyle Peterson – Newmarket-Aurora – firstname.lastname@example.org
Leona Alleslev – Aurora-Oak Ridges-Richmond Hill – email@example.com
John Brassard – Barrie-Innisfil – firstname.lastname@example.org
Peter Van Loan – York-Simcoe – email@example.com
Alexander Nuttall – Barrie-Springwater-Oro-Medonte – firstname.lastname@example.org
Kellie Leitch – Simcoe-Grey – email@example.com
Majid Jowhari – Richmond Hill – firstname.lastname@example.org
Deborah Schulte – King-Vaughan – email@example.com
Jane Philpott – Markham-Stouffville – firstname.lastname@example.org
Bob Saroya – Markham-Unionville – email@example.com
In the meantime, we are working to further understand the proposed changes and the effects they will have on our clients, as well as designing strategies to minimize their impact.
More to come…
The Partners and Staff of
Smith, Sykes, Leeper & Tunstall LLP
Chartered Professional Accountants