Over the past week the Government of Canada has made several announcements regarding changes to their original private corporation taxation proposals.
On July 18th, Minister Morneau first announced these proposed changes, with only a 75 day consultation period which ended on October 2nd. Finance Canada received over 21,000 written submissions, including one from your Chamber. Our submission featured several recommendations, including calling on the government to follow through on their campaign promise to lower the small business tax rate to 9%.
We were therefore pleased to see the government follow through on that commitment with their announcement last Monday. On January 1, 2018 the small business tax rate will be dropped to 10%, and then will be reduced to 9% on January 1, 2019. The potential total tax savings for an individual business could be up to $7,500 a year. These tax savings will benefit our entire economy, as small businesses will have more capital to invest in their operations and to create more jobs.
In addition the government also announced they would not be going through with their proposed changes to the lifetime capital gains exemption and in converting income to capital gains. This is another positive step, as those proposed changes could have increased tax bills by hundreds of thousands of dollars, and severely hampered the ability to pass on family businesses to the next generation.
Despite those positive moves, Prime Minister Trudeau said that a “simple and clear” framework would be put in place regarding income sprinkling. The government announced that in order to receive dividends, any adult family members involved in the business will have to demonstrate that they have:
- Contributed labour to the business;
- Contributed capital or equity to the business;
- Have taken on financial risks (such as co-signing a loan); and/or
- Show past labour, capital or risk contributions.
Businesses will be forced to show contributions of family members, and the currently proposed framework will surely add to businesses regulatory burden. The government has said that a key principle for them is to “Avoid creating unnecessary red tape for hard-working small businesses”. It is tough to see how this “simple and clear” framework will reduce their regulatory burden. It will be extremely difficult to not only capture, but to also judge the contributions of family members who participate in the million plus small businesses in Canada.
Those with pensions can split income with a spouse, so why shouldn’t small businesses owners be allowed to as well? Small business owners don’t get pensions, what they have for retirement is often saved inside their business. Pension splitting is no different than income splitting, you are sharing income. While the additional clarity has been welcomed, these updated changes still put small businesses at a disadvantage.
The changes made to taxing passive income in a business announced this past week were an improvement, but concerns remain. All past investments and any income earned will be protected, and businesses will be able to save up to $50,000 in passive income annually. So for example a $1 million portfolio that earns 5% a year would be protected, as that portfolio would earn $50,000 in a year.
However, that income threshold will limit the amounts that a business can save for expansion or a downturn as there is no “one-size fits all” amount that could possibly be introduced. In addition, it could also force businesses to put money into poorer performing investments. Finance Canada states that the $50,000 threshold is “to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick-leave, maternity or parental leave, or retirement”. Those objectives are highly dependent on the number of active shareholders in a business, maturity of the business, and the retirement timeline of the shareholders.
Of greater concern is that this proposal will add additional complications and increase the reporting burden that small businesses face. Investments that are currently existing will be grandfathered in, so you assume there will have to be some sort of valuation day to report on existing investments. Even if your business would likely never touch the threshold, you would still need to report. In addition, there will also be ongoing reporting requirements to separate post valuation day investments and the related income. There is no further guidance on the implementation but it’s not difficult to see how this “one size fits few” approach will be overly complicated and will increase the red tape and reporting requirements for small business.
Draft legislation regarding the passive income changes is to be released in the 2018 Federal Budget, and you can guarantee the Chamber network will be closely watching. The income sprinkling changes are still slated to come into effect on January 1, 2018 however. This is an extremely quick time frame for tax changes of any magnitude, let alone changes of this scale. With over 21,000 submissions received, Canadians certainly had a lot to say on these proposed changes, and it is difficult to see how the Minister and Finance Canada staff could go through all those concerns and recommendations in just two weeks.
The Winnipeg Chamber of Commerce is quite pleased that the Federal Finance Minister listened to our over 2,100 members concerns, and made some improvements to these tax changes. However we still strongly encourage the federal government to step back and to take a longer consultation timeline. In addition we encourage the government to review the entire tax system, so we can ensure that Canada is a competitive place to do business.
For further information on this and other Chamber advocacy initiatives, please contact Director of Advocacy, Michael Juce, at [email protected] or 204-944-3315.