Reduction to the Small Business Tax Rate to 9% by 2019
On October 16, 2017, the Department of Finance (“Finance”) announced that the small business tax rate -currently at 10.5% – will be reduced to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019. To support this change, the Government will take steps to ensure that Canadian-controlled private corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.
Proposed private company tax measures
Based on the feedback received from Canadians, in a series of country-wide consultations on the proposed new tax rules for private corporations, Finance stated that it will release later this fall revised draft legislative proposals on its private company tax measures.
In the course of the consultation period, Finance recognized the complexity of the proposed income sprinkling measures and the potential impact on small family businesses. Finance reiterates that it still intends to proceed with its proposed income sprinkling measures, but will make amendments to simplify the proposed changes ensuring that businesses with family members who “meaningfully contribute” to the business will not be affected.
Specifically, Finance will introduce “reasonableness” tests for adult family members aged 18-24, as well as those 25 and older. These persons will be required to demonstrate their contributions to the business based on four basic principals:
• Labour contributions
• Capital or equity contributions
• Financial risks, such as co-signing a loan or other debt
• Past contributions in respect to previous labour, capital or risks.
Finance is expected to provide more details on its income sprinkling proposals shortly.
Lifetime Capital Gains Exemption
Finance announced that it will not be moving forward with measures that limit access to the LCGE due to a number of identified potential unintended consequences associated with the proposed measures to address the multiplication of the Lifetime Capital Gains Exemption (LCGE). For example, concerns were raised on the potential impact on intergenerational transfers of family businesses.
Passive income and investment proposals
Finance says it recognizes the way in which passive investments within a private corporation are used by business owners, particularly small and medium-sized businesses, to manage personal income risk in the case of a downturn, sick leave or maternity or parental leave. In many cases, passive investments are used as a retirement tool for small business owners. Other retirement savings vehicles such as Registered Retirement Savings Plans are not sufficiently flexible and adaptable to address business volatility.
Accordingly, Finance stated that they are committed to addressing unintended consequences of its passive income proposals but have not yet provided any details on how they intend to do that.
Although a step in the right direction, in our view, there remains numerous areas of tax uncertainty, unnecessary red tape and related compliance costs and complexity for little benefit. Furthermore, the Minister of Finance continues to play with fire concerning the Passive Investment tax proposals with far too little external consultation. Seventy-five days consultation period remains insufficient for this type of legislation with such far reaching impact to Canadian business. We urge you to continue to express your concerns to your local MP concerning these tax changes. We will continue to do likewise and carefully monitor these substantial changes to our tax rules and their potential tax implications to your business. Should you have any questions, please contact your Bateman MacKay LLP tax advisor.
Richard Rizzo, CPA, CA, CPA