The federal government’s proposed tax changes for private corporations are being slammed by opponents who say they will have long-term, serious impact on small businesses and entrepreneurs.
Doctors, farmers and business leaders all say the proposed changes are harmful and several organizations representing these groups are putting their words into action.
There are three main changes being proposed by the federal government.
The first affects income splitting. Currently professional corporations are allowed to sprinkle income to family members, usually who are in lower tax brackets or who may not pay tax at all, through dividends. The new rules would make this more difficult, especially to family members between the ages of 18 and 24.
Sprinkling is often used by wealthy business owners and professionals such as doctors and lawyer, many of whom have incorporated businesses. The head of the Canadian Medical Association recently said the changes could have a “deleterious” effect on patient car by making it harder for physicians to practice.
The second involves cracking down on holding passive income within a corporation. This allows owners the ability to build up wealth within a corporation rather than in a regular personal savings account which can result in a significant tax savings when the money is paid out.
The government also is proposing to end the practice of converting a corporation’s private income into capital gains, which are taxed at a lower rate than dividends.
“Every year the tax system gets more complicated and this is no exception,” says Jason Pereira, a senior financial consultant with Investment Planning Counsel. “These tax exemptions aren’t loopholes – they were created and left in the system by design and now the government wants to take them away. They don’t hurt just wealthy Canadians – they hurt everyone who has a corporation.”
The government has said the measures will prevent businesses from taking advantages of tax strategies which are not available to other Canadians and allow people to use a corporate structure to shield their income and get a tax advantage.
But groups like the Canadian Federation of Independent Business, for example, say the proposed tax measures in conjunction with policies from other levels of government such as increases in the minimum wage and carbon taxes are increasing the costs of doing business in this country.
As well, the Canadian Chamber of Commerce is calling on the government to extend the period of time that it has set aside to consult with people and groups about the proposed changes and is mobilizing opposition against the changes by urging its network of local chambers across the country to contact their Members of Parliament.
Even the farming community has sounded alarm bells over the proposed changes. About one quarter of farms in the country are family corporations which could be affected.
About the only tax advantage left for private corporation owners if the changes go through will be the lifelong capital gains exemption, Pereira says. The exemption of about $400,000 in lifetime capital gains is available for small business corporation shares, and farm and fishing properties.
“That’s about all that’s left,” Pereira says. “These changes are incredibly detrimental”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.