Proposed tax changes that may have a significant impact on self-employed professionals and the owners of small incorporated businesses

Proposed tax changes that may have a significant impact on self-employed professionals and the owners of small incorporated businesses

As you may have heard via various media sources yesterday, the federal government has released – for discussion purposes – a series of proposed changes to the income tax rules affecting self-employed professionals and other owners of small incorporated businesses. I have now had an opportunity to read through this material, and can offer the following comments:

The government’s most detailed proposals attacks the now commonly-used strategy known as “dividend sprinkling”. The government points out, quite correctly, that there are significant tax benefits to spreading dividend from your small business among various family members. They consider this unfair, since taxpayers who are not self-employed cannot use such strategies. Also they point out, again quite correctly, that these strategies most benefit those families which include young adults in post-secondary education, or who otherwise have lower incomes than their parents.

To address this perceived “unfairness”, the government proposes to extend the existing “kiddy tax” (which applies the highest personal rate of tax on certain dividends paid to minor children) to family members over the age of 17. They also would like to impose a ‘reasonableness test’ on the payment of dividends to certain family members.

It seems likely that many families will respond to this by choosing to pay salaries to family members more often, rather than dividends.

A second proposal is designed to address the ‘unfairness’ (in the government’s eyes) of the fact that self-employed individuals can invest their savings within their own corporations with largely pre-tax money. That the self-employed hold an advantage in this is certainly true – your corporation can be thought of as an over-sized RRSP. Using many pages of graphs, tables, and examples, the Finance Department demonstrates the obvious quite nicely: your savings will grow much faster if you don’t have to pay all your taxes up front.

The government’s proposed response is a bit vague, but includes resurrecting a plan first tried in 1972, then quickly abandoned as being too complex to be workable. The entire tax system is even more complex now, and I suspect these plans are all that much more unworkable today. However, families who might benefit from the existing rules should consider accelerating their plans, to benefit from ‘grand-fathering’ before any such tax changes are finalized. The current proposal process is intended to last 75 days, which means you have roughly until the end of September before the barn door might close.

A third area addressed in these proposals is “multiplication” of the Lifetime Capital Gains Exemption. The LCGE is a bit like the unicorn; often discussed but much more rarely seen. If you are fortunate enough to have a business you are actually selling, and if it will be a share sale rather than a sale of business assets, then these changes might affect you. Otherwise, they probably won’t.

As always, if you have any questions, please don’t hesitate to call me.

All the best, Larry

Larry Tomlin MBA; FCPA, FCMA; CIM; C.Dir

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