The Smithers District Chamber of Commerce held a special luncheon Sept. 28 for small business owners and accountants to discuss the government’s proposed tax changes that is geared towards people who are using corporations to pay less taxes.
The Chamber states while the proposed changes are meant to affect the wealthy, the impact will be felt by small-business owners, who was described as the backbone of the Canadian economy.
Those proposed changes are involve income sprinkling, passive income and converting income to capital gains.
At the luncheon there were three accountants. One of them was Michael Mehr.
“I hope that the government takes the comments that they get back and give them a careful look. I feel like there’s some significant changes they can make and still meet the objectives that they’re actually hoping to achieve and have less impact on the complexity of the small business,” he said. “This is a real change for small business owners, it’s going to make it very difficult to accumulate funds for retirement through their small business and so I think it’s a very important issue for them.”
“The Smithers Chamber was happy to host local accountants discussing proposed federal tax changes at today’s lunch in order to provide information to our members so that, if they felt that the changes would negatively impact them, they had the resources to make their comments to the government,” said Heather Gallagher, manager of the Smithers District Chamber of Commerce.
Some business owners sprinkle income to family members by way of salary or wages, or dividends, to reduce the family’s overall tax burden. There are already rules in place to prevent unreasonable salary or wages from being paid to family members who are not truly earning the compensation they receive. There are even “kiddie tax” rules to prevent dividends paid to minor children from being taxed at their lower rates.
As for what the government wants to change, they want to restrict the ability to pay salary or wages, or dividends, to adult children between the ages of 18 and 24, by extending the “kiddie tax” rules – formally called the “tax on split income” (TOSI) – to them. The proposals will apply a “reasonableness test” that will assess the adult child’s contributions to the business (both labour and capital) in determining whether amounts paid to that child should be taxed at his or her normal tax rates, or at the highest tax rate possible.
When a corporation generates income, it’s eligible for a pretty attractive rate of tax (about 15 per cent, but it varies by province) on the first $500,000 (federally) of active business income. If a business owner doesn’t need all of his earnings to support his lifestyle, it’s common to leave the rest in the corporation to invest – perhaps in a portfolio earning passive income. For example, if you earn $100 in active business income and pay $15 of that to the taxman, you’d have $85 left to invest in the corporation.
Converting income to capital gains
Some corporate owners have taken steps to convert what would otherwise be taxed as salary or dividends into capital gains. This has been done using a complex set of steps involving selling of some shares to another company related to the shareholder. The government proposes to close these opportunities by tweaking section 84.1 of our tax law, which was intended to prevent this type of planning but doesn’t quite do the trick.
“The Canadian Chamber of Commerce and BC Chamber of Commerce are lobbying for an extension to the consultation period and to consider a comprehensive review of the Canadian tax system. There are 1,167,978 employer businesses active in Canada, 97 percent of the businesses are small and medium sized businesses employing over 11.6 million people. SMEs employ 90.3 percent (10.5 million) of the private sector workforce, highlighting the important role SMEs play in employing Canadians,” said Gallagher.
The 75-day consultation period ended Monday, Oct. 2.