Last in a series of tax advice from Demo.
Tax Changes Are Coming
Small Business Tax Proposals: Pared Down
Last summer, the federal government released a consultation paper targeting the tax planning strategies of private corporations that were perceived as unfairly reducing the personal taxes of high-income earners. This involved three areas: income splitting through income sprinkling, holding passive investment portfolios within a corporation and converting regular income into capital gains.
In the fall of 2017, after a consultation period that saw over 21,000 submissions, the government announced that it would pare down the original proposals as follows:
The government had originally intended to target owners of private corporations who were lowering taxes by sprinkling income to family members. It now intends to focus only on income sprinkling for family members who do not meaningfully contribute to the business. At the time of writing, draft legislation is pending, with changes expected to be effective for 2018 and subsequent tax years.
Proposed measures to limit access to the Lifetime Capital Gains Exemption have been abandoned.
Holding passive investment portfolios
The government has pared down this controversial tax proposal. The revised proposal will allow for an annual amount of up to $50,000 of passive income to be earned in a corporation without being subject to proposed higher tax rates. (According to the Finance Minister, this is equivalent to $1 million in savings, based on a nominal
5 percent rate of return.) This is meant to ensure flexibility in retirement or a financial cushion of savings for business owners.
Existing passive investments and related income will not be affected. Draft legislation, including a technical description of how the threshold will be applied, is expected in Budget 2018.
Converting income into capital gains
The government has abandoned this proposed tax reform that would have restricted the conversion of income into capital gains, acknowledging that it would have created difficulties for farmers/fishers in passing along their businesses to their children.
Reduction in the Small Business Tax Rate
In addition to these changes, the government announced a reduction in the small business tax rate. It has been proposed to be lowered to 10 percent (from 10.5 percent) as of January 1, 2018. It will be further reduced to 9 percent as of January 1, 2019. (The tax rate for non-eligible dividends will be adjusted to maintain integration of corporate and personal taxes.)
At the time of writing, these tax measures are still in the proposal stage and have not been enacted into law. For more details, please see the Government of Canada website: fin.gc.ca