You may already be aware of the tax changes announced by the federal government on July 18, 2017 with potentially significant consequences to the owners of small business corporations. Generally, the announcement includes the following proposed changes to the taxation of small business corporation owners:
- Restrictions on the ability to split income with family members. Currently, family members can be shareholders of the corporation and receive dividends which are taxable to the recipient family members. The changes will generally restrict the payment of dividends to family members unless there is a reasonable contribution by the family member to the corporation by way of employment, asset contribution and/or assumption of risk. The test of “reasonableness” is vague and creates tax risk if income splitting measures are continued by the small business owner.
- Restriction on the multiplication of the capital gains exemption among family members on the sale of qualified small business corporation shares. Currently a typical share structure for a small business corporation includes a family trust of which the family members of the owner are beneficiaries. If the business is sold by transferring the issued and outstanding shares of the corporation to a third party purchaser resulting in a capital gain of more than roughly $835,000, the owner could choose to allocate some or all of the excess gain to the shares held by the trust to a beneficiary of the trust [a spouse or child] who could also shelter, in the case of each beneficiary, an additional exemption of $835,000. The proposed changes would restrict these allocations and decrease the effectiveness of this structure in reducing capital gains paid when a business is sold.
- Restrictions on corporate transactions which effectively convert dividends to capital gains which have a lower applicable tax rate. Although the transactions involved in the conversion of dividends to capital gains involve some complexity while a business corporation is operating, a major concern with this proposed change is the possible elimination of post mortem tax planning to avoid double taxation in the event of the owner’s death [typically referred to as “post mortem pipeline strategy”]. Without this planning mechanism, on the death of the owner of the small business corporation shares, tax is triggered on the capital gain accrued on the value of the shares held by the owner [which typically would have a nominal cost base, and as such, the gain would be on the full value of the shares]. Then a second level of tax is incurred on the sale of the underlying assets of the corporation in order to pass proceeds to the deceased owner’s beneficiaries.
- Measures to tax passive income earned by the corporation not reinvested by the corporation into the business or active business assets. Effectively what is proposed is a significantly higher rate of tax on income earned by an active business corporation that is not re-invested in the business – essentially a bump in rate to offset the lower corporate tax rate that would otherwise apply and prevent the deferral of tax otherwise currently available until a later point in time.
These proposed measures have been the subject of much commentary already. Accountants, lawyers, and other tax advisors were the first to voice concern over the proposed changes and the impact on the owners of small business corporations. Many small business owners, now understanding the impact these changes, have added their voices of concern regarding these proposed measures, or are at least adding their voices to try to defer the timing for implementation so that there can be a fulsome discussion on the potential impact of these announcements.
Locally, a group of accountants, lawyers, small business owners, and concerned residents have formed a group called KASB – Kingston Advocacy for Small Business – to explain to small business owners the potential impact of these measures and to advocate on their behalf.
Particular emphasis has been placed on presenting to Mark Gerretsen, our local MP, the negative features of these measures. To this end, I invite you to access the KASB facebook page, to review the letter sent on behalf of small business to Mark Gerretsen and to indicate your support by signing the petition available through facebook or at the very least “like” the KASB facebook page. I encourage you to separately correspond with Mark Gerretsen, if you agree with our stated positions on these proposed measures, to indicate the specific hardship you may suffer if these measures are implemented as currently proposed.
Unfortunately the government has given a very short window for consultation. That period expires October 2, 2017. Adding your name on social media and to the petition is critical and timely to demonstrate to our elected officials the broad and concerning impact this will have on all private company business owners and families in our community.
As a final request, KASB has partnered with the Kingston Chamber of Commerce to host an information session on September 19, 2017 at 7 pm at the Delta Kingston. Please attend this session to learn more about the proposed tax changes and to indicate your support for efforts to make meaningful and appropriate changes to the proposed measures. You may register to attend through the Chamber’s website.
As your advisors working to identify and mitigate risks to your family and your business, we have made every effort to speak and advocate on your behalf, however, your voice and involvement is very important if we are to have any hope in persuading the government to make changes. Also please spread the word to your other business contacts to make them aware and get them involved.