Changes to Specified Income

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  The Government did this despite the Standing Senate Committee on National Finance recommending that the proposals be withdrawn or deferred until January 1, 2019, and for the Government to undertake an independent and comprehensive review of Canada’s tax system.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.

Proposed Changes to the Taxation of Private Corporations

On July 18, 2017, the federal Minister of Finance, Bill Morneau, announced extensive proposed changes to the taxation of private corporations in Canada.  These changes likely will impact you, and will likely result in you having to pay significantly more in taxes starting in 2018.  For more information, please visit the following links:

  1. www.cpacanada.ca/en/connecting-and-news/news/professional-news/2017/july/finance-canada-consultation
  2. www.taxpayer.com/commentaries/bill-morneau-s-attack-on-the-middle-class
  3.  www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp

These changes were proposed to ensure the wealthiest of Canadians pay their fair share of taxes.  Unfortunately, the proposed changes impact ALL private corporations, not just those that are owned by the wealthiest of Canadians.  In fact, the majority of private corporations in Canada are owned by “middle-class” Canadians, the very group of Canadians that the Government promised to protect. 

We do not believe that these proposals are fair, and are counter-productive to the Canadian economy as a whole for the following reasons:

  1. The proposals are based on the unsupportable argument that an employee and a private corporation owner should be taxed the same.  We believe that a private corporation owner carries significant additional risks and responsibilities that an employee does not, hence warrants the current tax regime;
  2. The proposals argue that spouses who are not directly involved in the business do not share in the risks and rewards of the corporation;
  3. The proposed changes casts a tax net at the wealthiest of Canadians that is so wide that it is going to catch hundreds of thousands of Canadians in the middle-class, resulting in the largest tax increase in decades to the middle-class;
  4. The proposed changes take away an important incentive for people to take risk and to innovate in Canada;
  5. The “trickle-down” effect on the economy will be far in excess of the tax revenues generated;
  6. A 75-day consultation window, in the middle of summer, is not properly consulting with the Canadians affected, especially given the changes proposed are changing tax law that has been in place for over 40 years;
  7. The proposed changes are overly complex, thus resulting in significant tax uncertainty for all impacted.

We think that you, as a private corporation owner, should be aware of 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 consultation period ends on October 2, 2017.

Some of these proposals are scheduled to come into law on January 1, 2018, which will likely impact your 2017 tax planning decisions.  As there may be significant amendments to the proposed legislation (or hopefully abandoned altogether depending on the response from Canadians during the consultation period), we do not recommend any action with regard to your business structure at this time.  However, we will be in touch with you after the consultation period closes and once it becomes clear as to the extent of the final proposed changes.