On October 16, Finance Minister Bill Morneau announced the federal government’s response to the more than 21,000 submissions it received during the previous three months with regard to the government’s proposed changes to the tax treatment of small business. The changes are:
- The Small Business Corporate Tax Rate will be reduced.
- Higher taxes on ordinary (non-eligible) dividends.
- Rules related to “Income Sprinkling” will be simplified.
- Access to the Lifetime Capital Gains Exemption will not be changed.
- Rules governing the Conversion of Capital Gains into Dividends will not be changed.
- The government will work to make it easier and less costly to transfer business to the next generation.
- Proposals for the tax treatment of Passive Income will be revised.
Download a more comprehensive primer from the Canadian Chamber of Commerce covering all of the updates.
The changes relating to points 1, 4, 5 & 6 have been welcomed by the Thunder Bay Chamber, the Canadian Chamber and by businesses across the country. The reduction of the Small Business Corporate Tax Rate will save companies earning $500,000 in income eligible for the small business deduction $2,500 in 2018 and $7,500 annually from 2019 onward. Similarly, retaining current Capital Gains exemptions and conversion rules is good news. We applaud the government for listening to the concerns of small business owners and entrepreneurs and taking action to address these issues. However, we remain concerned about the potential negative impacts of tax changes on small business investment and growth relating to the tax increase on ordinary dividends, the lack of detail provided relating to income sprinkling, and the proposals for the tax treatment of passive income.
We expect that the revised rules on Income Sprinkling will be released within the next few weeks (before Christmas). With that in mind, the Canadian Chamber has called for the government to ensure it: allows sufficient time for input from business; considers an exemption from the rules for spouses; and, postpones the implementation of the changes until at least January 1, 2019. You can be assured that we will keep our members informed of these details when they are made available.
The revisions to tax treatment of passive income continue to be surrounded by uncertainty. The Chamber is concerned: that the $50,000 threshold is inadequate for small businesses that are saving in order to make larger investments in innovations or business growth; and, that the threshold is too small to provide business owners with long-term earnings security. We firmly believe that the government should not proceed with its passive income rules until a full economic impact assessment has been carried out and an approach has been developed that can ensure there will be no unintended negative consequences to business investment.
In light of mounting regulatory compliance costs imposed by all levels of government, proposed carbon taxes, and the prospect of US tax reform, the Canadian Chamber is calling on the government to undertake a comprehensive review of the tax system and is recommending that it establish a Royal Commission to do so. In addition, the Canadian Chamber will launch its own competitiveness assessment of Canada’s business tax system in 2018. The findings of this review will help to shape the priorities for tax reform.
Our Chamber is proud to be working with the Canadian Chamber on these important issues and will continue to work together to advocate for a tax system that is fair and competitive for all Canadian businesses.