The federal government recently proposed a number of tax changes which will impact small business owners. The government has invited comments on these proposals until October 2nd, 2017.
As an active member of Kingston Advocacy for Small Business (KASB), Angela Brown met with Mark Gerretsen, MP for Kingston and the Islands, and Bardish Chagger, the Honourable Minister for Small Business and Tourism, as part of a roundtable to discuss the tax proposals on September 17th. This was a constructive discussion which focused on the impact on small businesses and the potential for unintended consequences. We have been advocating for a delay in the implementation of the tax changes so that the impacts can be better understood and the proposals modified where appropriate.
A summary of the key tax proposals are as follows:
Many small businesses are structured to allow family members or family trusts to own shares in the company. This allows dividends to be paid to family members who may be taxed at a lower rate. It also allows the family members to make use of their own capital gains exemption, which may reduce the ultimate tax paid by the family on a sale of shares of private corporation. The proposed tax changes would limit the ability of family members to benefit from lower tax rates on dividends and from using the capital gains exemption on a sale if they did not contribute a reasonable amount to the business. It is unclear under the proposals what would be considered a reasonable contribution.
Currently a small business can retain income in the corporation and invest those funds passively to be used later when needed. When funds are invested within the corporation, the gains are taxed at a lower rate. The gains are ultimate taxed later when withdrawn from the corporation. Keeping the funds in the corporation gives business owners flexibility as to how and when to use the funds. The proposed tax changes would effectively increase the tax rate applied to funds passively invested within a corporation.
Converting Income to Capital Gains
The proposals on this measure have the greatest impact on taxation on the death of a business owner. Presently, on death of a shareholder, the business can be transitioned to a family member through a complex set of transactions to result in comparable tax rate as if sold to a third party. However, the proposed tax changes would have the result of creating a higher effective tax rate on the transition of the business to a family member compared with the sale to a third party.
Many of our clients will be impacted by these tax proposals. Each situation is unique, and we encourage you to speak with your professional advisors as to the potential impact on you. We will be consulting with our clients when the tax changes are finalized to assess the optimal structure for their situation under the new rules.
If you have questions, please do not hesitate to contact:
Angela K. Brown, Partner
Additional information can also be found at: