Back in July, Finance Minister Bill Morneau announced his plan for corporate tax reform, stating that the intention was to level the playing field for all Canadians by removing ‘unfair advantages’ currently offered to small businesses. This led to an outpouring of rhetoric, as expected, and there has been steady media coverage of the subject ever since. While some are praising the proposal, others are criticizing its framing of ‘loopholes’ and other language, arguing that the current setup exists with good reason. Strong opinions have formed, and there is great debate in the small business, farming and medical professional communities.
Understanding that we are all entitled to an opinion and not every investor will feel the same way, Mailey Rogers Group would like to present some key facts about taxation in Canada. We hope you will use these facts to better understand the proposal and form your own opinion on the matter.
- The tax proposal made in July was given a 75 day consultation period which is to end on October 2, 2017. It was proposed that new regulations take effect in 2018.
- Morneau has stated that small businesses in Canada have increased by over 50% in the past 15 years. There are almost 2 million private corporations in Canada – 8x higher than in 1972, when current tax laws were introduced (TheStar.com)
- The proposal aims to reduce passive income that accrues while saved as investments in a small business corporation, as these investments are not subject to the same limits as other savings vehicles, such as RRSPs, and are taxed at a lower rate than personal income.
- The differing perspectives are complex but can be simplified as follows: to some, this system allows business owners to reserve money as protection in place of the benefits/security many salaried employees receive; to others, the current system allows private corporations to avoid fair taxation.
- The government has proposed a new reasonableness test to eliminate “income sprinkling” to family members as a tax avoidance strategy. Income sprinkling is defined well by Jamie Golumbek of The Financial Post, [July 21, 2017]: “Private corporations can pay dividends to family members who, if they have no other income, can use their basic personal amounts to shield such income from tax. For example, in Ontario, an individual with no other source of income could receive about $51,000 in eligible dividends without paying a cent of federal or provincial tax. In many corporate structures, it’s typical for the common shares to be held by a family trust in which the spouse and the kids of the owner/manager are the beneficiaries and the trustee has discretion as to which beneficiary receives dividends each year and how much each receives.”
- The new reasonableness test can be summarized, again by Golumbek, as this: “Under the proposed new rules, an adult family member will be expected to contribute to the business, either in labour or capital, in order be exempt from the TOSI on income received. In other words, the amount received by such adult family members must be ‘reasonable.’ There is a stricter test for 18-24 year olds.”
- Of the 1.17 million employer businesses in Canada, 1.14 million of them are considered small businesses (Advisor.ca) 70.5% of Canadians are employed by a small business (Statistics Canada)
Consider a comparison of these further areas (chart from Advisor.ca – link below):
Source: John Nicola and Elliott Levine / September 26, 2017
We suggest your read the above article for more information on benefits given to civil servants and salaried employees, as well as the risk associated with self-employment. The article may not be unbiased, but it presents a lot of solid facts.
This is clearly a complicated issue but our hope is that information may assist you in coming to a conclusion as to what’s “fair”. Thanks for reading, and please let us know if you have any questions about the above information or how these changes will affect you if put into action. We’d be happy to hear from you.