The 2017 Federal Budget alluded to certain tax changes for small business owners, including incorporated professionals such as doctors, lawyers, accountants and others. In fact, these proposals will both negatively impact many of the owner-manager businesses in Canada and also deter many new business owners form wanting to incorporate. These changes will also make Canada look less attractive for new entrepreneurs.
The areas of change proposed within this legislation are as follows:
1) Income sprinkling by professionals: this is where money is transferred from someone in a higher tax bracket by way of sprinkling income to their spouses and children who are both usually in lower tax brackets. The new legislation enacted is designed to put a stop to this as this was perceived to allow an unfair tax advantage. CRA will need to determine what is actual income based of someone’s contribution and money that is paid to avoid taxes.
2) Private corporations holding passive income investments inside the company: CRA wants to put a stop to people from benefiting from investing through a corporation. Holding such investments as stocks or real estate within the corporation allows the company to take advantage of the significant tax deferral this gives them, usually at twice the after-tax return of the same investments held personally. Even though investments are taxed similarly, it is better to keep investments within the business as the business is taxed at a lower rate.
3) Converting Dividend income to Capital Gains: The proposed new measures seek to eliminate tax plans that convert dividend income to lower taxed capital gains, as the current anti-avoidance rules do not completely curtain using this type of planning. So CRA is broadening the rules to target taxpayers who pay tax at capital gains rates when taking funds out of their company, for instance doing so for the conversion of salary or dividends to capital gains.
4) Intergenerational Business Transfers: Legislation is coming in to prevent a person from selling the shares of a private corporation to another company owned by a related person and using their lifetime capital gains exemption deduction to remove a corporate surplus on a tax-free basis. The proposed legislation will be problematic in those situations where family members are legitimately buying each other out.
Be aware that the above are an over-simplification of the current and proposed tax changes. This is just intended to advise all incorporated business holders, regardless of if you are holders of professional corporations, other small business or farm corporations.
To those of you out there owning incorporated companies; you will all need to consult with your accounting CAs as to the impact of any of this legislation on your business and any tax planning strategies. This new legislation is seen as a huge tax grab by CRA so as always – tax planning is all about the details. It’s important to deal with an accounting firm with the in-depth knowledge and experience and specialists in order to capitalize on the opportunities that might still be available to minimize or defer your taxes.
Image licensed through Shutterstock