Who will be affected by the proposed changes to income tax law?
Recently, the federal government proposed changes to income tax laws that represent a reversal of 45 years of tax policy and planning and that disproportionately affect family-run and closely-held small businesses. (Read more about the changes in our earlier blog post here.)
The new rules target private corporations because the government says that owners of those corporations enjoy tax planning opportunities not available to “ordinary Canadians” and as a result that they do not pay their fair share of taxes. In all cases, the government is comparing the after-tax profit earned in a corporation with the after-tax salary of an employee. No regard is given to the risks taken and efforts expended to earn those profits, relative to the security of a steady paycheque.
Specific rules implementing some of the changes have already been drafted. These draft rules are out for comment until October 2 and the government has indicated it expects the changes to be effective as of January 2018, with some effective as of the date of release of the draft rules, July 18, 2017.
The government has also indicated that it is considering further changes, but has not yet settled on the form such measures would take. Those measures will target investments held in private corporations.
The draft rules will significantly reduce the effectiveness of tax planning strategies that have, until now, been both commonplace and sanctioned by the Canada Revenue Agency, such as:
- Freezing in favour of a trust, or holding shares through a family trust
- Paying dividends to family members, including university-aged children and lower-income spouses
- Typical post-mortem tax planning for estates with private company shares
You may be affected by these rules if:
- You own a business or investments through a corporation
- You pay dividends, interest income or other amounts to family members, either directly or through a trust
- You have a family trust as a shareholder of your corporation
- You are in business with one or more members of your family
There is no assurance that the proposed rules will become law in their present form, or at all. However, given the scope of the proposed changes and their potential effect on what has, to this point, been considered conventional tax planning, we are reaching out to you, our present and past clients, to make you aware of the looming changes and to encourage you to consult with advisors to determine how your particular situation may be affected, and what changes might have to be made to existing structures both before the end of the year and in 2018.
In some cases, no action will be required, but in other cases planning that was done for reasons of tax efficiency will become very tax inefficient as a result of the draft rules. In those cases, positive steps may be required to mitigate the effect of the new rules, possibly even reversing planning previously undertaken. The draft rules make it difficult to undertake some of those steps after 2018.
Our tax team would be happy to meet with you to review your particular structure and help you decide on a course of action in light of the proposed new rules.
The draft rules represent an enormous change to the way small and medium closely-held businesses are taxed in Canada. They reverse decades of policy and practice, and propose to do so with less than three months’ notice. There is not enough attention being paid to these changes in the media, and across industry groups. That is likely due to the sheer complexity and scope of the rules and the short amount of time in which to review them. If you are concerned about the effect these rules could have on your business, your financial plans, or your industry, we encourage you to spread the word to other business owners, and to communicate your concerns to your MP. The federal government has made it clear that it values the views of “ordinary Canadians” above those of lawyers and accountants. These rules will not change because we take issue with them – but they may change if members of parliament understand how much Canadian small businesses and the people who run those businesses are harmed by them.
By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.