Risk & Business Magazine Gillons Insurance Magazine Fall 2017 | Page 7

TAX FAIRNESS
BY: JASON WILLIAMS,
TAX PARTNER, BDO
Tax Fairness?
What You Need To Know
O
n July 18, 2017, the federal
government released
tax proposals aimed to
“improve fairness” and
“close loopholes” that have
been available to “high income earners”
since 1972. The basis of the proposed
changes? Restrict the benefits of a private
corporation.
While the intent may be to address the
perception of “unfair” tax treatments, the
reality is the proposed changes will affect
many small businesses that also operate
through a private corporation.
Broken down, these proposals will affect a
small business in three critical ways:
1. RESTRICT THE ABILITY OF SMALL
BUSINESS OWNERS TO REDUCE THEIR
FAMILY’S TAX BURDEN BY PAYING
DIVIDENDS TO FAMILY MEMBERS IN
LOWER TAX BRACKETS (ALSO KNOWN
AS INCOME SPLITTING).
The government is trying to restrict
the ability to income split by using a
“reasonableness test” to assess if family
members work for the business. This will
add more red tape to operations as business
owners will need to prove that their family
members are “legitimately” working for
the business. If the government (Canada
Revenue Agency) disagrees and says your
family members are either not legitimately
working in the business or feels they are
overpaid, it will force them to pay taxes
at the top rate (53 percent) on the income
deemed to be an overpayment.
The fact is, when one starts a business,
everyone in the family is involved and
everyone takes on the risk. This change will
apply starting January 1, 2018.
2. RESTRICT THE ABILITY OF PRIVATE
CORPORATIONS TO SAVE IN THE
COMPANY.
Current tax rules allow you to keep
investments (such as savings, GICs, and
stocks) in private corporations. These
investments are important for owners
investing in their business because they
assume so much risk and can’t easily access
financing. Many of them also use these
investments as a buffer against emergencies
or unforeseen costs; and to save for
retirement, because they don’t enjoy the
pensions, benefits, and income security that
are offered to civil servants.
The government is proposing to increase
taxes on the income earned on passive
investments inside private corporations to
a whopping 73 percent starting January 1,
2018.
3. RESTRICT THE ABILITY OF
SHAREHOLDERS OF PRIVATE
CORPORATIONS TO CONVERT
DIVIDEND INCOME INTO LOWER-
TAXED CAPITAL GAINS.
However, the proposal—which has already
passed into law effective July 18, 2017—
doubles the tax cost of selling a family-
owned business that operates as a private
corporation to another family member (i.e.,
the next generation) compared to selling to
a nonfamily member.
Finally, when owners of private corporations
want to retire, they often sell their shares
to family members. When they sell their
shares, they pay the lower capital gains tax
(23 percent) rather than the higher dividend
tax (45 percent). The new rules will allow
owners of private corporations to pay the
lower capital gains tax only when they sell
their shares to nonfamily members. This
rule has already been passed into law and
will make it more costly to transfer your
business to your children.
Unfortunately, the 75-day consultation
period, which allowed for Canadians to
voice their concerns, ended on October 2,
2017. But not all is lost. Since the proposals
were announced, BDO Canada has been
aggressively fighting the federal government
to scrap these proposals and, in turn, engage
in real tax consultations.
If you have any questions or would like to
discuss your personal circumstances, please
do not hesitate to contact your local BDO
office. +
Jason Williams is a tax partner with BDO
and is based in Thunder Bay. Jason has over
twenty years of experience in the field of
taxation and has practiced in both Canada
and the United Kingdom.
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