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Proposed Small Business Tax Changes

People have been asking, "What can you tell me about the proposed federal tax changes announced on July 19, 2017 and their effect on small business?"

The federal government says that the Finance Ministry's proposals in general, "improve the fairness of Canada's tax system" and “close loop-holes”. But in fact there are no “loop-holes”, since it is the federal government that put all existing rules in place, and did so in a considered manner. In fact, it was Prime Minister Justin Trudeau’s father, Pierre Trudeau, who implemented a broad range of tax reforms, which took effect on January 1, 1972. Small business owners have since then developed their businesses and their financial plans in line with such rules. 

In response to the proposed changes announced by the federal government, there has been outrage and deep disappointment in many sectors with both the proposed changes and the short time frame in which they will possibly be implemented. The Liberal party is one that claims it champions small business and entrepreneurship, and yet its proposed tax changes will result in the removal of tax incentives which recognize the risks business owners take.

David Rosenberg, who is the Chief Economist & Strategist at Gluskin Sheff, wrote the following in an opinion piece in the Saturday September 16, 2017 edition of The Globe and Mail: ”The self-employed deserve better tax treatment because of the inherent risks they take on compared with an at-will worker, full stop. Comparing tax structures between the two is truly dangerous and making any rash changes, as seems likely, could very well tip the economy into recession. From what I see and hear, this is a very poorly thought-out strategy, and one that can end up having far-reaching negative impacts. Keep in mind that the federal government seems intent on moving to a system that will level the playing field between small private businesses and the working class, something that is very rare around the world, and for good reason.”

One of the best letters that we have read describing the issue from a professional independent business person's perspective was written by Dr. Deepa Soni. You can read it here https://drdeepasoni.wordpress.com/2017/08/29/open-letter-to-pm-trudeau/

Here is what you need to know:

First, these are only proposals. You can check them out by clicking here.

http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.pdf

Second, they potentially affect anyone who owns a Canadian-controlled private corporation, including those who have a Professional Corporation (i.e. doctors, lawyers, dentists, financial planners, etc.). FYI - this proposal also affects independent farmers.

Third, the proposed changes focus on three main areas identified in Budget 2017:

  *   the proposed changes will limit ‘sprinkling income’ using private corporations (i.e. paying family members, when no work is performed by such family members);

  *   the proposed changes will restrict the ability to hold a passive investment portfolio inside a private corporation

(i.e. neutralize the tax-assisted financial advantages of investing passively through a private corporation); and

  *   the proposed changes will affect a business owner’s ability to convert a private corporation's regular income into capital gains (i.e. to prevent the surplus income of a private corporation from being converted to a lower-taxed capital gain, and stripped from the corporation).

Fourth, several of the proposed measures are slated to be implemented as of January 1, 2018, a mere 91 days after October 2, 2017.

We feel that pulling out the existing tax rules (commencing the beginning of next year) and replacing them with rules that substantially adversely affect small business owners, and which ignore the substantial risk taken by such business owners and their contribution to the economy, is the upmost example of unfairness. Anyone else who feels concerned by this is invited to write and voice their concerns to their Member of Parliament and/or anyone else with influence in Ottawa.

Link for MPs - http://www.ourcommons.ca/Parliamentarians/en/members)

In addition, the Government is accepting submissions on these proposals until October 2, 2017, and you may send your comments to  fin.consultation.fin@canada.ca

Finally, you may wish to talk to your tax advisor to determine what necessary planning should

be considered and what changes should be implemented should the proposed measures be finalized and passed into law. However, at this point, it is anyone’s guess what will happen.

In summary, these proposed changes will affect you, if you run your small business using a private corporation, so please act now!

Co-authors:

Heather Freed, CFP, CLU, CHS, Group Benefits, Insurance, Estate & Financial Planning
416-806-5478 or Heather@Freed.ca
www.freed.ca

and

Diane Karnay, Counsel at Wilson Vukelich LLP
60 Columbia Way, 7th Floor
Markham ON L3R 0C9

T 905.944.2950 or dkarnay@wvllp.ca