This post was originally published in September 2017.
As you may have noticed, small business tax planning is currently under siege due to the recently proposed tax changes presented by the Liberal government. Their proposal reads like a manifesto against small business owners with the Liberals accusing them of “getting a better deal than others” and declaring that they are not “paying their fair share of taxes”. Their stated goal is to “close loopholes that are only available to some – often the very wealthy or the highest income earners – at the expense of others.” This rhetoric is rife with misconception and could not be more false.
Further, I find these proposals surprising in their complexity, pervasiveness, and mean-spiritedness, which in some cases will result in double or retroactive taxation for small businesses. At the very least, these proposals will cause an outright increase in tax for families, professionals, and other business owners.
Here are some of the proposed tax changes that I find most concerning:
The government is trying to limit a business owner’s ability to reduce their family’s tax bill by sprinkling income to family members through salary or dividends. While there were already rules in place to prevent unreasonable salaries from being paid to family members, the government has gone a step further by extending restrictions on children from age 18 to 24. They are also looking to apply this to second generation income (income earned on income), which was not previously the case. If that wasn’t bad enough, the Liberals are also trying to restrict the use of the lifetime capital gains exemption (LCGE) by family members and trusts. Confused yet?
Currently, business owners can decide to leave some of their profits in their corporation to invest, rather than paying everything out to themselves. These funds are typically used for reinvesting back into their business, saving for retirement, and many other reasons. The government seems to believe that this practice is offensive and is taking steps to prevent this by proposing a plethora of complex refundable tax rules.
It is unfortunate that the Liberals have chosen to treat small business owners this way. As we know, small businesses are the life-blood of the Canadian economy and hallmarks of our local communities. Owners take a tremendous risk by not only starting their venture but also over time as they re-invest profits back into their businesses to create more jobs and other benefits for the economy.
The Liberals have given us until October 2, 2017 to respond to their proposals. Tax experts across the country have been urging the government to slow down this process, drop the rhetoric, and do it right through a reasoned discussion. Let’s hope they listen.