The week of Oct. 16 was a tough one for the federal government as the Finance Minister – with the odd bit of help from the Prime Minister — responded to the furor over his proposed tax changes to private corporations, backpedalling and amending a number of the measures.
What went wrong with the government’s original plan and were the changes (to the changes) good and did they go far enough?
“The government’s original intention was to cast a small net but the way they were written they were far more significant and cast a much broader net than the government originally had intended,” Dave Walsh, tax service leader with BDO Canada, said in an interview.
Since they were released, the proposed tax changes for private corporations have been slammed by professionals and business associations who said they would have long-term, serious impact on small business and entrepreneurs.
Following a period of consultations, the government came up with a series of new amendments and changes which it released during the Oct. 16 week.
“I’d say that the announcements during the week cleared up a lot of the problems but I’m not sure they got everything right,” Walsh said.
Under the latest round of changes the government dropped proposals that would have affected capital gains and made it more difficult and expensive for owners to pass on their businesses to the next generation.
Under intense pressure the government abandoned rules that would have severely limited access to the Lifetime Capital Gains Exemption which provides a tax exemption for capital gains realized by individuals on the sale of qualified small businesses and farms.
The government also announced it was lowering the small business tax rate, which will drop to 10 per cent on Jan. 1, 2018 and then to nine per cent on Jan. 1, 2019, and made some concessions on income sprinkling and the rules on passive investments.
Income sprinkling involves sprinkling the income of private corporations to family members, who usually are in lower tax brackets or who may not pay tax at all, through dividends. Sprinkling often is used by wealthy business owners and professionals such as doctors and lawyers, many of whom have incorporated businesses.
The new rules would have made this more difficult. However, after feedback and consultations the government said it would simplify the rules and reduce the burden to comply with them. The government now estimates that only three per cent of owners are affected. The majority of private corporations will not be affected.
As for passive income, the government announced proposals to crack down on the holding of passive income within a corporation. Building up wealth within a corporation rather than in a regular personal savings account can result in significant tax savings.
Again, the government had to soften their proposals and subsequently announced that the first $50,000 of passive investment income earned by Canadian private corporations would be allowed under the current tax structure and would not be subject to a new tax that the Liberal government announced earlier this year.
The latest changes only will apply to future passive investments rather than those held within private corporations today. The finance department has said that only about three per cent of private corporations in Canada earned passive taxable incomes above the $50,000 threshold.
“The three per cent affected by the changes to the passive income and income sprinkling rules is the narrow net that the government originally had planned to cast,” Walsh said. “The first changes proposed clearly were more significant. These amendments have responded to the tax industry, professionals, small businesses and voters and have narrowed the net to what the government originally intended.”
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.