On Oct. 16, the federal government announced it would cut the small business tax rate to 9 percent from 10.5 percent by 2019.
While this is welcome news for most small business owners, it has failed to alleviate concerns about proposed changes to the way private corporations are taxed.
These changes are designed to target three common tax planning techniques often used by private corporations, including small businesses.
The first is income splitting.
Family-owned businesses often split income among members who share ownership for tax and succession benefits. The primary benefit of income splitting is allowing dividends to be paid to family members in a lower tax bracket.
The proposed changes are basically an expansion of the so-called kiddie tax, which is now called the tax on split income and applies to any related person. The types of income subject to this tax are broader as well, including capital gains from selling certain shares.
Adults can potentially be exempted from the increased tax rate if their earnings are reasonable and consistent with what would have been paid to an arm’s length individual.
The second target of the proposed reforms are capital gains exemptions.
Traditionally, capital gains from qualified small business corporation shares have enjoyed shelter from taxation under a lifetime limit. The proposed changes will remove the potential for multiple family members to use this exemption when a small business was sold.
The third tax planning method to be changed is individual business income and conversion.
Corporations are taxed at a much lower rate than individual business income, which is meant to encourage investment in the business to increase employment and broaden the tax base. The Federal Government believes this practice is not having the desired effect and is seeking new ways to tax this passive income.
In addition, shareholders will no longer be able to choose to receive earnings from their small business as a capital gain rather than a dividend.
Have Your Say
Whatever your views on the proposed changes, it is important to have your say as the federal government considers how best to reform small business taxes. For your convenience, we have template letters available that you may complete and send. Contact us for more information (514) 227-2700.
You can mail any Member of Parliament at the following address:
Name of Member of Parliament
House of Commons
Or email them using the Current Members of Parliament directory: http://www.parl.gc.ca/MembersOfParliament/MainMPsCompleteList.aspx?TimePeriod=Current&Language=E