In October the Federal Government abandoned many of the proposed changes, while amending others, as a result of the massive outcry from the small business community.
However, one area the Government insisted would still be implemented on January 1, 2018, are the proposed changes to the “dividend income sprinkling” rules. That said, they promised to simplify and better target the rules, but they have not done so. They also promised to issue revised measures during the fall. On December 13, 2017, literally minutes before the legislature rose for their winter break and shortly before Canadians went on their Christmas break, the Government issued the revised measures, stating that the rules will still come into effect on January 1, 2018 and insisting their timeline has given Canadians enough time to plan their situations. The Government did this despite the Standing Senate Committee on National Finance recommending that the proposals be withdrawn or deferred until January 1, 2019, and for the Government to undertake an independent and comprehensive review of Canada’s tax system.
Given the complexity and vagueness of the rules, a detailed review of the proposals is beyond the scope of this e-mail, however please feel free to review the Technical Backgrounder on Measures to Address Income Sprinkling here - http://www.fin.gc.ca/n17/data/17-124_2-eng.pdf. You can also view a “simplified” flowchart to assist you in determining how the new rules might apply to your situation here - https://moodysgartner.com/tax-split-income-flowchart/.
A simplified summary of the rules is, in the case of dividends paid to inactive family members, the dividend income splitting rules will not apply to non-service businesses, however they will apply to service businesses, thus greatly increasing the family tax burden of service businesses only. The term service business has not been defined by the Government, as such the applicability of the rules to certain companies will be unclear for some time.
The rationale for the Government to single out service providers as opposed to businesses that sell product is perplexing. As an example, a painter using a corporation to income split with their spouse, making $150,000 per year and employing 20 people in a small rural community, will no longer be able to income split with their stay at home spouse raising their children because the business supplies a service, and does not sell a product, costing the family approximately $14,000 more in taxes annually. Using the same example except say the business is a group of successful car dealerships making $100M+ per year selling cars - in this case the family will not be impacted at all, and the family will continue to benefit from being able to income split with inactive family members, simply because they are selling products (vehicles) as opposed to providing a service.
We urge you, as a private corporation owner, to familiarize yourself with these proposals and how they may affect your business, your family, and your future. It is a very good time to contact your Member of Parliament (Pamela Goldsmith - Jones - [email protected] or 604.913.2660) to express your concerns before the proposed rules are finalized as part of the Governments February budget.
As we seek to finalize your own compensation strategy before the end of February, we will be reviewing the proposed rules potential impact to your specific situation, and advise you accordingly. As always, please don’t hesitate to contact us with any questions you have.