We’ve seen a flurry of comments from small business and tax planning industry groups as the government’s consultation on corporate tax changes came to a close this week. These groups have mobilized to get their message out beyond the business media in a clear effort to capture public interest and sentiment. Now what?
It’s safe to say that the government’s own communications have not been as effective as it might have liked. Rather than its narrowly-framed focus on wealthy individuals taking unfair tax advantage, people are beginning to wonder whether the proposals will hit more broadly than pitched, and whether that in itself is unfair.
As to the substance of the proposals, business owners can take comfort that tax on business income is not what’s being targeted here. Rather, the proposals look further on into who owns a corporation and how its income and assets are distributed to shareholders. This will affect closely-held corporations with family shareholders, as well as investment portfolios in such corporations. In brief:
- Extending the tax on split income (TOSI) that applies on dividends to minor children – commonly known as the kiddie tax – to adult children who have little involvement in the business
- Limiting the lifetime capital gains exemption on shares held by those caught by the TOSI
- Tightening/increasing tax on passive income in corporate investment accounts
- Restricting maneuvers on sale of shares that may convert regular income to capital gains
It bears noting that the practices under scrutiny are not back alley dealings; they are well within the law, and have been openly used for decades.
Nonetheless, there is a logical argument that some of these existing rules may indeed be viewed as unfair. An owner’s decision to structure a business in a particular way may implications beyond the benefit to the commercial operation, including reducing ultimate personal tax – whether or not that may have been intended. Thus, if we were only looking from this point forward then this could arguably be characterized as fair warning on the future use of a corporation in the launch of a new business.
But we are not at a standing start, and the tax system today can’t be so easily divorced from the past. Business owners who committed their capital years or decades back could be forced to deal with a very different set of rules than they began with. Still, as lobbying continues, we may yet see some relief on the scope of the proposals, the implementation timeline and potential grandfathering.
Nonetheless, individual businesses cannot sit idly by while the government contemplates its next move. Ideally they will already have spoken with their tax advisors about a contingency plan. At a minimum this would outline the nature of the decisions ahead and potential deadlines – some of which could be required before the end of 2017 – so that they can act decisively once there is more clarity.
As to when we can expect official word, the Fall Economic Statement is usually around mid-November, though if lobbying efforts succeed then maybe we’ll hear something sooner.
As a final thought that is really just speculation, maybe the announcement will be accompanied by a drop in the small business rate to 9%. The Liberals promised that in the 2015 campaign, but then held it at 10.5% once they got into office. In fairness, that would be a small sweetener to the bitter medicine that appears to be coming.
Doug Carroll is Practice Lead for tax, estate & financial planning at Meridian Credit Union
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