Proposed Business Income Tax Changes:
In an announcement on July 18, 2017, Finance Minister Bill Morneau advised that the Department of Finance Canada is proposing certain business tax changes with the goal of “improving fairness in the tax system by closing loopholes and addressing tax planning strategies.” The proposed changes will impact NDs who have an incorporated business or practice (a private corporation).
Summary of proposed changes:
- Sprinkling income using private corporations. Involves diverting income from a high-income individual to family members with lower, or no, personal tax rates. Government wants to prevent income being diverted to family members who have no legitimate role in the business.
- Holding a passive investment portfolio inside a private corporation. Also known as the “Deferral Advantage” which allows owners to hold profits in a corporation. Current tax rate is 15% (varies) on the net income left in the incorporated company (up to $500,000). When the owner takes the profit out of the company it is taxed at a personal tax rate (varies but approx. 40%). Proposal will have net income left in a corporation taxed at 53% plus a 20% penalty for a total tax rate of 73% – higher than ANY personal tax rate.
- Capital Gains – Converting a private corporation’s regular income into capital gains. Some corporations have used complex steps that involve selling shares to another related company, so that they can convert what would be taxed as salary or dividends into capital gains resulting in lower or no income taxes.
Next Steps:
- The CAND strongly recommends that NDs who have, or are considering, incorporating as a business corporation consult their accountant, business advisor or a tax lawyer on how the proposed changes will impact their business.
- The CAND strongly recommends that NDs who have, or are considering, incorporating as a business corporation consult their accountant, business advisor or a tax lawyer on how the proposed changes will impact their business.
- Canadians have until October 2, 2017 to submit their comments to the government.
- The CAND has also prepared a Tax Template Letter which can be edited to reflect your circumstances and is encouraging NDs to use it to provide their input to the federal government by email to [email protected] as well as their local MP.
- To find the contact information for your Member of Parliament(MP) using your postal code.
- Please copy the CAND on any responses received or questions you may have to [email protected]
- The CAND is preparing a submission for filing with Finance Canada which it will share with members upon completion.