Revised federal tax changes: More left to be done but a step in the right direction for business

Posted by: Alycia Lowdon on October 26, 2017

On July 18, 2017, the federal government announced some of the most sweeping changes to business tax laws seen in decades. At the Chamber, we made it our mission to advocate on behalf of your business, and ensure the federal government understood the consequences of their proposed measures.

Last week, during Small Business Week, the federal government announced that they will be scaling back the tax changes originally proposed. While the Chamber supports the federal government’s decisions to reassess their initial proposals, there is still much more work to be done to improve Canada’s tax system. 

Updates to proposed federal tax changes

1. Canada’s business competitiveness 

On October 16, 2017, the federal government announced, as previously committed to in their Liberal Party 2015 Election Platform, they would in fact be reducing the small business tax rate from 10.5% to 10%, effective January 1, 2018, and to 9%, effective January 1, 2019.

As this was one of our Budget 2018 recommendations, we applaud the government’s decision to reduce the small business tax rate.

The Chamber encourages the federal government to continue to improve Canada’s tax competitiveness by reducing the overall complexity of our tax system.

2. Income sprinkling

Original proposal: The federal government proposed to broaden the existing tax on split income (TOSI) rules so family members who receive an “unreasonable” amount of income relative to their business contributions will be taxed at the highest personal income tax rate.

During consultations with Calgary businesses, we heard that 63% of businesses would be impacted by this proposed change.

Update: The federal government has announced it will simplify the original proposal to limit income sprinkling among family members, and reduce the compliance burden of establishing the contributions of family members.

However, few details have been released as to how the government will actually simplify their proposals. Further details will be released in revised draft legislation later this fall. 

We strongly urge the federal government to refrain from applying the tax on split income rules to spouses and common law partners in the revised legislation.

Spouses play a large role (both directly and indirectly) in many small businesses and their efforts should be acknowledged financially. They share the success, risks, and failures of the business, and the provinces’ matrimonial property regimes are consistent with this principle.

3. Holding passive investments inside a corporation

Original proposal: Corporate income taxes are generally lower than personal income tax rates. Business owners have an incentive to earn income in a corporation and retain the after-tax earnings in the business to earn passive income.

On July 18, the federal government announced its intention to limit this business tax deferral opportunity.

During consultations with Calgary businesses, we heard that 76% of businesses would be impacted by this proposed change.

Update: The federal government’s recent announcement to allow an annual $50,000 passive income threshold to ensure business owners can hold savings to finance retirement, future expansion, or reduce the impact of economic downturns, is a step in the right the direction.

As many business owners do not have pension plans or other social safety nets to rely on, the lower corporate rates are used to build savings for retirement or future business expansion, and to mitigate losses – including employment losses – during downtimes. 

This update appears to be a step-up from the original proposals. However, the recent announcement lacks details, and will still add a layer of complexity to the current tax system.

The business community will have to wait until draft legislation is released as part of Budget 2018 to fully understand this proposed change.

4. Converting income into capital gains

Original proposal: The tax changes that were proposed in July to deal with converting income into capital gains could have discouraged the intergenerational transfer of businesses.

Many business owners have raised concerns that the original proposals would make it harder to keep their business within the family than to sell to an unrelated domestic or international buyer.

During consultations with Calgary businesses, we heard that 66% of business would be impacted by this proposed change.

Update: The Chamber supports the federal government’s decision not to move forward with measures relating to the conversion of income into capital gains, along with the measures that would have limited access to the lifetime capital gains exemption (LCGE).

We are encouraged to hear that the federal government has committed to working with “family businesses, including farming and fishing businesses, to make it more efficient, or less difficult, to hand down their businesses to the next generation.”

What it all means

The most recent updates to the tax proposals announced during Small Business Week, while not perfect, do represent positive steps away from the original proposals.

While the Chamber supports the objectives of recent announcements, there are still issues with the proposed tax changes that remain.

First, there is still large uncertainty among the business and professional community around the technical details of the proposed tax changes.

The Chamber is concerned that while these are positive announcements, the revised legislation (when released) still has the potential to make many business owners worse off.

We will have to wait for the revised draft legislation to determine how the proposed changes will affect the business community. We will stay on top of this issue, and analyze the legislation as it is rolled out.

Second, the proposed tax changes shine light on the major issue with Canada’s tax system. Namely, it is too complex.

The complexity is especially impactful for small businesses who are typically unable to allocate additional resources to navigate the tax system. The Chamber believes that a comprehensive review of the Canadian tax system – with simplification as a main objective – is greatly needed. 

At a time where other jurisdictions are embarking on major overhauls of their tax systems, it’s time that we take an in-depth and independent look at our tax competitiveness.