Proposed Changes to Corporate TaxesProposed changes could have a significant impact on many Canadian businesses: potentially raising taxes, increasing the administrative burden on SMEs and heightening the impact on family-run businesses.
December, 2017: On December 13, 2017, the federal government released revised draft legislative proposals to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who are subject to lower personal tax rates and do not directly contribute to the business. Thunder Bay Chamber Member Grant Thornton has supplied a brief explaining these proposals. Read it here.
November, 2017: In response to feedback from Members of the Canadian Chamber – including dozens of other local Chambers like ours – the Federal government has issued a revision to their proposed changes. Thunder Bay Chamber Member Grant Thornton has kindly provided a brief analyzing the impact of these changes. Check it out here.
The Department of Finance Canada is considering major changes to how corporations are taxed. The proposed rules could have a significant impact on many Canadian businesses: potentially raising taxes, increasing the administrative burden on SMEs and heightening the impact on family-run businesses.
On July 18, Finance Canada launched a consultation on how “tax-planning strategies involving corporations are being used to gain unfair tax advantages.” The document contains proposed policies to close these “loopholes.”
There are four key changes that will affect business:
- Sprinkling income using private corporations: The government wants to tighten rules to prevent a business owner from unfairly transferring income to family members who are subject to lower personal tax rates. In certain circumstances, owners would have to demonstrate that wages and dividend payments are “reasonable.”
- Multiplying the Capital Gains Exemption: When an individual sells a small business, the first $850,000 of capital gain is exempt from taxes. The government wants to prevent tax planning structures that enable multiple family members to use their exemptions.
- Reducing the tax deferral advantage on portfolio investment inside a corporation: Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates (which are generally much lower than personal rates). The owner defers paying personal income or dividend taxes until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
- Converting a private corporation’s regular income into capital gains: Income is normally paid out of a private corporation in the form of salary or dividends that are taxed at the owner’s personal income tax rate. In contrast, when a business is sold, it is taxed as a capital gain, where only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains. The government wants to tighten the rules to prevent certain tax planning structures, but it is open to more favourable treatment for genuine family business transfers.
3 Things You Need to Know About These Changes:
- Do you employ family members? The government wants to scrutinize their compensation to apply a much higher tax rate on income they consider “unreasonable”.
- Do you invest the profits from your business? The federal government is proposing to tax that income at an effective rate of 70%.
- Do you want to pass your business on to your children? Tough new rules make it difficult for younger kids to get the capital gains exemption. They could be double-taxed.
What We’re Doing for You:
Our small and medium-sized businesses (SMEs) are the engine of the Canadian economy – estimates range from 85 to 90% of all businesses in Canada are SMEs. The Chamber network across Canada is using its collective voice on this issue; your voice as a business person needs to be heard as part of this initiative. Click here to read the policy brief and learn about the Canadian Chamber’s position and its plans to advocate at the Federal level.
Thirty-five business groups, including the Canadian Chamber of Commerce — on behalf of the hundreds of thousands of members they represent through Chambers like ours — have presented a letter to Finance Minister Bill Morneau asking the government to take these proposals off the table and instead meet with the business community to address any shortcomings in tax policy affecting private corporations.
On September 13, we held a free information session presented by Grant Thornton to familiarize Members with the details of the proposed changes and provide an opportunity to join the discussion. Click here to read the primer supplied by Grant Thornton and get an overview of the proposed changes to corporate taxation.
September 23 through 25, representatives from your Chamber attended the Annual General Meeting of the Canadian Chamber of Commerce in Fredericton, NB, where this issue was front and centre. The resolution “Stop the Harmful Tax Changes on Private Corporations” was passed, calling for the federal government to:
- Extend the current consultation period beyond October 2, 2017 so as to ensure broad participation by Canada’s SME community.
- Establish a royal commission to undertake a comprehensive review of taxing statutes guided by the principles of simplification and modernization, as well as having the goal of reducing compliance costs to make Canada a competitive tax regime once again.
- Establish a standing committee with active representation from the SME community to support the commission by continuously monitoring changes and publicly reporting progress at least annually.
How You Can Participate:
- Add your voice
The Chamber network across Canada is using its collective voice on this issue; your voice as a business person needs to be heard as part of this initiative. Send a message to your MP today! Government needs to know that this tax reform will harm businesses of all sizes. Download a template letter that you can personalize in minutes.
- Add your voice
- Contact us to be included on our mailing list for this issue and you’ll receive updates about our activities, related events and resources.
3. Sign Our Petition to the Minister of Finance
Sign our petition to urge the Government of Canada to put these changes on hold to avoid hurting small businesses across the country. We need to hit pause and make sure we have a plan that is fair but does not kill the ability of small business to grow and hire more people.
This is a Federal Issue.
Our local Members of Parliament:
Thunder Bay – Rainy River
Marcus Powlowski, MP
Thunder Bay – Superior North
Patty Hajdu, MP
Resources Related to Corporate Tax Issue
- Consultation Documents supplied by Finance Canada
- Policy Brief prepared by Canadian Chamber of Commerce
- Letter Template - personalize and send to your MP
- Letter Sent to Finance Minister Morneau by the Canadian Chamber & partners
- Policy Primer - Understand the Changes - supplied by Grant Thornton
- Resolution passed by Canadian Chamber: “Stop the Harmful Tax Changes on Private Corporations”
- Sign the e-Petition to Minister of Finance Hon. Bill Morneau and 4 others
- Private company tax proposals: What’s the status? - Brief on October 16 revisions, supplied by Grant Thornton
- Revised proposals to limit income sprinkling - Brief on December 13 revisions, supplied by Grant Thornton