The Department of Finance Canada is considering changes to how corporations are taxed. The proposed changes could have a significant impact on businesses including but not limited to, raising taxes and increasing the administrative burden on SMEs.
On July 18, Finance Canada started the consultation process of examining how tax planning strategies are being used to gain unfair tax advantages. Finance Canada released a document containing proposed changes to policies to close those loopholes. Here are four changes that would affect businesses:
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, business owners 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.
The Canadian Chamber of Commerce and its Taxation Committee are currently studying how the proposed changes will affect businesses across the country. Brampton Board of Trade members are invited to participate in the process by offering feedback to be submitted as recommendations to Finance Canada.
The Canadian Chamber is looking for detailed examples and cases of how the changes would impact your small business. All feedback can be sent to Hendrik Brakel by August 11.
Written with files from Ontario Chamber of Commerce.