In the Fall Economic Statement of October 24th, the federal government changed course on a couple of fronts,
such as no change to the Capital Gains Exemption and a reduction to the Small Business Corporate Tax Rate to 10% on January 1, 2018 and 9% on January 1, 2019, but there is still concern around potential changes to passive investments and income sprinkling.
The Peterborough Chamber of Commerce and dozens of other chambers and boards of trade had the opportunity to hear from Finance Minister Bill Morneau at the Canadian Chamber of Commerce (CCC) Annual General Meeting in
Fredericton at the end of September. This meeting was very much at the height of opposition and resulted in a policy resolution calling for a comprehensive review of the tax system through a Royal Commission.
The Peterborough Chamber also asked that any proposed tax changes for small business be subject to an economic analysis.
Since that meeting the CCC has committed to launching its own competitiveness assessment of Canada’s business tax system in 2018. With mounting regulatory compliance costs at all levels of government, proposed carbon taxes, and the continued advancement of the tax reform bill in the United States, understanding Canada’s tax competitiveness is key to continued growth.
What has changed and where does concern still exist? The Canadian Chamber explains:
The Small Business Corporate Tax Rate will be reduced
The government will reduce the federal small business tax rate from its current level of 10.5% to 10% as of January 1, 2018 and 9% as of January 1, 2019. This measure reinstates the gradual rate reduction to 9% announced by the previous government but halted in Budget 2016. The tax rate reduction was included in a Notice of Ways and Means Motion tabled as part of the government’s Economic Update on October 24.
This reduction will save companies earning $500,000 in income eligible for the small business deduction $2,500 in 2018 and $7,500 annually from 2019 on.
The Canadian Chamber has welcomed this move.
Higher taxes on Ordinary Dividends
In conjunction with the small business rate reduction, the personal tax rate applied to ordinary (non-eligible) dividends will increase. The purpose is to maintain the integrative nature of the personal and corporate tax systems, ensuring that the aggregate level of tax paid on dividends will remain the same regardless of whether income is earned as an individual or through a corporation. However, this change could result in an overall tax increase for some small business owners, which for some, might exceed the savings associated with a reduction in the small business tax rate.
The Chamber has proposed that a grandfathering mechanism be introduced.
Rules related to “Income Sprinkling” will be simplified
Widespread and serious concerns were raised with respect to the complex rules the government was proposing to introduce aimed at restricting the payment of income to adult family members unless the amounts were determined to be reasonable. The government also proposed that it would treat some capital gains as ordinary dividends.
The Chamber remains concerned that the changes, when they are announced, will not take into consideration all of the ways that family members contribute to a small business and that the reasonableness test that will be applied by CRA will still be intrusive and complex.
We have called for the government to:
- Announce its simplified rules as soon as possible and allow ample time for input from business;
- Consider at a minimum an exemption from the rules for spouses; and,
- Postpone the implementation of the changes until January 1, 2019 at the very least.
Proposals for the tax treatment of Passive Income will be revised
The government intends to proceed with proposals to increase tax on corporate passive investments funded from after-tax business earnings, effectively double taxing the eventual distribution of passive investment earnings. However, the government now proposes that the new tax increases will only apply to passive income in excess of an annual threshold of $50,000 and will be applied only on a go-forward basis. It is expected that the draft legislation will be tabled along with the federal 2018 budget.
The Chamber’s position with respect to the government’s new proposals to tax passive income is that:
- The $50,000 threshold is inadequate for small businesses that are saving in order to make larger investments in innovations or business growth;
- The threshold is too small to provide business owners with long-term earnings security;
- The government should not proceed with its passive income rules until a full economic impact assessment has been carried out and an approach has been developed that can ensure there will be no unintended negative consequences to business investment.
The CCC has identified some next steps and dates to watch for:
December 15 – The Senate
Finance Committee will release its report on the Small Business Tax changes based on the cross-country consultations it undertook during the fall in which many Chambers took an active role.
Sometime before Christmas (our bet is just before Christmas) – The government’s new rules on income sprinkling need to be tabled if the government is to meet its January 1 date for implementation.
March – Budget 2018 will most likely contain draft legislation on passive investment.