On July 18, 2017, the Department of Finance (Federal) released a consultation paper that proposes new tax rule changes that may impact many common tax strategies that many small business owners implement today. Impacts to multiple common tax strategies are listed here.
If you believe that as a small business owner you are being unfairly targeted by the Canadian Government, you have the opportunity until October 2, 2017 to comment on these changes. All Canadians can provide their comments in the following link:
http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp
Although these are just proposed measures, it is important as a business owner to understand how this may impact your existing tax planning strategy and to be proactive in making changes as necessary to your current plans. If you need assistance in determining the impact it will have on your business, please contact our office and speak to one of our tax professionals today.
Income sprinkling
As proposed, the ability to split income to your spouse and between family members will be greatly restricted. The tax on this split income will have a reasonability test component implemented and income splitting to related family members may be subject to kiddie tax (effectively tax at the highest marginal rates in Canada). The consultation paper also proposes to limit access to the capital gains exemption to certain individuals and Family Trusts. This may increase the tax on the sale of certain small businesses when the transaction relates to the sale of shares.
The changes are expected to be effective in 2018.
Passive Investments in Corporation
The Federal Government is proposing is to eliminate the ability of corporation to generate additional capital through income being taxed at small business rates and using that tax deferral to buy passive investments (stocks, rental real estate properties, GICs), rather than investing directly back into their business by means of high wages for employees, new machinery or other methods to improve productivity etc. The Federal Government is still seeking significant feedback on this topic. However, the new tax system regarding holding passive investments is expected to be complicated for many small business owners and the compliance cost to be quite high.
The timing on implementation on this part of the proposal has not be specified.
Corporate Surplus Stripping
The Federal Government is expanding its rules with regards to corporate surplus stripping. It will limit certain tax planning methods involving the ability to extract corporate surplus normally taxed as a dividend rates to be taxed at capital gains rates.
The changes for implementing these new corporate surplus stripping rules will be effective on amounts received or receivable on or after July 18, 2017.