Tax Changes Update – November 3, 2017

Earlier this year, the federal government announced that they were planning some changes to the tax legislation, many of which would directly affect small business owners. The goal was to push the legislation through in 75 days. There has been some major pushback both on the timeline and how the changes would affect tax planning for small business owners.

Ultimately what they’re trying to do it is level what they see as an uneven playing field when it comes to paying taxes. Currently, a small business owner can ‘spread the wealth’ among family members when it comes to the profit, which results in them paying less tax, but a salaried employee doesn’t have that option.

The government wants to change that, but small business owners are protesting, saying that their risks are different than a salaried employee with a steady job.

The government has effectively shrugged their shoulders and said there shouldn’t be a situation where one can benefit enormously because they own a business.

Here’s an example:

You have two people. One works for CIBC and has a salary of $300,000. The other runs a business that earns a profit of $300,000. Both are married, both have a kid in university and a younger child.

We can set it up so that the business owner pays significantly less tax than the salaried employee. In fact, there are no fewer than three different ways that we can structure it so that the business owner pays less tax through dividends paid to family members, getting family members involved in the business, and family trusts.

Another far-reaching change involves capital gains tax paid when a business is sold. Currently, if a business owner sells the company, they pay no tax on the first $835,000. If for instance, the business can be sold for $1.6M, and their spouse owns half of the company, that spouse can also claim an additional $835,000.  The initial suggestion in the legislation was to end this option, but the problem remains – how do you define who contributed what?

Take the example of a spouse who owns the business and one who stays at home. Can you say the stay-at-home partner made no contribution? If not, how do you determine what that looks like?

What if the business is owned by two spouses, but those spouses have different roles in the business.  Is one person’s contribution smaller than the other? Whose? And by how much? They’ve backed off on that because of the pushback and these reasonable questions.

The third change, which is one of the more complicated, deals with the passive income a business is generating through investments. If your business is generating more than $50,000 in interest or other investment income per year, you may be affected.

Please get in touch if you have any questions about the proposed changes and how you may be affected.