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Milestone Elements™: Tax Changes for Independent Business - What we know and what we don't know

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Tax Changes for Independent Business: What we know and what we don’t know 

Through the month of October we gained some measure of clarity on the proposed tax changes to small business in Canada that were announced back in July. Below is a summary of what we know, what we don’t know, and an old promise revived.

Passive Income Tax: The government announced that the first $50,000 of passive income received by a corporation would not be subject to the new tax regime. Furthermore, the government indicated that it will only apply to new investments, suggesting that existing passive invesstment will be grandfathered. While this is encouraging for many businesses, it appears we will have to wait until the 2018 federal budget legislation to attain greater clarity on how income above that threshold will be taxed.

Income Splitting: Although a conciliatory tone was sounded from government on this measure, we still have no details. We await legislation, perhaps this fall, which will clarify what restrictions will be placed on income “sprinkling” for business owners who wish to distribute income to family members who are not active in the business.

Surplus Stripping: The federal government announced that it will not move forward with measures relating to curtailing the conversion of income into capital gains. The consequences for the intergenerational transfer of businesses, most notably farmers and fishers, indicated that the government should back away from this and look at other ways of addressing the gaps they perceive in the current tax code.

Lifetime Capital Gains Exemption (LCGE): While it would appear the government has backed off on changes to the LCGE, watchers are viewing this with a keen eye. The provision here most pertinent to many of our clients is the spreading out of the LCGE to family members through the use of a Trust. Backing away from this is cause for a collective sigh of relief.

Small Business Tax Rate: Largely seen as a measure of damage control, the Liberal government reintroduced a formerly abandoned campaign promise to reduce the small business tax rate to 9%. This rate is based on the first $500,000 of active income earned by a corporation, and from its current level of 10.5%, it will be reduced to 10% in January, and then down to 9% in 2019.

This unexpected announcement of reviving the drop in the small business rate has had most industry watchers a bit puzzled.  The amount of tax proposed to be levied under July’s business “fairness” tax changes will be eclipsed by the amount of tax revenues forfeited from the small business tax rate decreasing to 9%. It therefore looks like the government is striking a conciliatory tone with business owners who have felt that they’ve been under assault with both the proposed fairness changes and the narrative that accompanied them. For business owners, there are a number of checks in the win column for October, but all eyes will be on the 2018 federal budget to clarify a number of unknowns.