Quietly this summer, Finance Minister Bill Morneau announced proposed changes to the corporate tax structure in Canada. The changes, according to the federal government, is meant to address fairness and make the 1% pay their fair share of taxes. Upon further review, economists, business, and tax experts share a different view. One Liberal strategist labeled the proposed changes as grossly unfair and a danger to the entrepreneurial spirit which creates jobs, and the Canadian Chamber of Commerce refers to them as the most radical tax overhaul in 50 years.
Proposed changes include:
- Sprinkling income using private corporations: The government wants to tighten rules to prevent a business owner from unfairly transferring income to family members who are subject to lower personal tax rates. In certain circumstances, owners would have to demonstrate that wages and dividend payments are “reasonable.”
- Multiplying the Capital Gains Exemption: When an individual sells a small business, the first $830,000 of capital gain is exempt from taxes. The government wants to prevent tax planning structures that enable multiple family members to use their exemptions.
- Reducing the tax deferral advantage on portfolio investment inside a corporation: Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates (which are generally much lower than personal rates). The owner defers paying personal income or dividend taxes until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
- Converting a private corporation’s regular income into capital gains: Income is normally paid out of a private corporation in the form of salary or dividends that are taxed at the owner’s personal income tax rate. In contrast, when a business is sold, it is taxed as a capital gain, where only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains. The government wants to tighten the rules to prevent certain tax planning structures, but it is open to more favourable treatment for genuine family business transfers.
Over the last few weeks, the Manitoba Chambers of Commerce (MCC) has heard from a number of local Chambers asking for more information, how members will be impacted, and what can we do as a Chamber network to make our voices heard. Without question, the federal government must hear from the business community. Please click here to access a letter that we encourage you to send to your membership. One of the critical areas to emphasize is the importance of the direct impact these changes would have on small and family run businesses. If you don’t know how to contact your local MP, please click here to find out how.
Over the coming days, MCC will gather more information and develop communications that we will share with Manitoba Chamber network. As we continue this process, we would ask that if any members have a story, or would like to share your concerns on the impact these changes will have on you, that you email our Director of Policy and Communications, Cory Kolt.