The Advisor Special Feature: Small Business Tax Changes

Compiled and written by Ross + Sylvestre Chartered Accountants LLP

October 18th Update: Small Business Tax Changes


To mark small business week in Canada, Prime Minister Justin Trudeau and Finance Minister Bill Morneau have embarked on a week-long roadshow across Canada, day-by-day unveiling their updated small-business tax reforms. After much furor and outcry from professionals, doctors, lawyers, tax advisors, various small business owners and associations in response to the July 18th small-business tax reforms, which threatened to hurt the livelihoods of many middle-class entrepreneurs, several tweaks have been made to the original proposal.

The Finance Ministry received 21,000 responses during its consultation period that closed October 2, 2017; upon review of the submissions, in addition to several meetings with business owners, the finance minister has made a number of changes to his original proposal.

 


What you need to know: 

  1. Small business tax rates (federal) will be decreased from 10.5% to 9%. Effective January 1, 2018, the rates will drop to 10% and effective January 1, 2019, to 9%.
  2. Up to $50,000 of annual revenues can be sheltered within the corporation as passive investment at the previously established rates; passive investments above the $50,000 mark will be taxed at the new (higher) rates.   
  3. The proposals will not be retroactive, meaning money already in passive investment portfolios (and the income earned from those investments) will be protected.  
  4. The government has decided not to move forward with the proposed measures targeting the multiplication of the lifetime capital gains exemption (LCGE). This measure originally proposed to deny the LCGE to individuals who did not make a reasonable contribution to the business, as well as to trusts.

The prime minister said the government would also simplify one of its more contentious proposals, which would limit the ability of business owners to lower their personal income taxes by sprinkling their income to family members who do not contribute to their companies. It is yet unclear how that will be achieved, with the earlier proposal referencing a “reasonability” test.

Morneau has also signaled that he’ll address the concerns of angel investors and venture capitalists, whose financing helps start-up companies get off the ground, to ensure continued investment in Canada’s promising upstarts.

More will be revealed as small business week activities continue.