Federal tax changes add new threats for independent business

The tax burden is one of the biggest challenges your business faces, and it could get worse with new changes proposed by the federal government. That’s why we are urging the government to make the system fairer for small business owners like you—and why we need you to join the fight.

The lower tax rate on the first $500,000 in corporate income has been vital to the success of many small firms—but some big business groups, academics and government officials have called on the government to limit access to or completely eliminate the small business rate. In fact, despite an election pledge to cut the rate from 10.5% to 9%, the government hasn’t followed through. What’s more, they have proposed changes to the tax code that we fear could make things even harder for owners.

While these changes are intended to make sure the wealthiest Canadians pay their fair share of taxes, the government appears to forget that the vast majority of independent business owners aren’t the 1%; they’re the middle class. These misguided proposals are compounded by an already troublesome future, with Canada Pension Plan and Employment Insurance rates increasing, minimum wage hikes in some provinces and looming carbon taxes.  Governments must stop their hits on small businesses!

Alarming tax changes announced
The latest set of proposals, announced in July 2017, seek to eliminate or restrict some ways that business owners can save on taxes, including:

• Sharing income with family members, 
• Saving passive investment income in a corporation, and
• Converting a corporation’s income into capital gains.

These measures are currently legal and are often used by many different independent businesses to reinvest in the business, ensure the stability of the firm in leaner times or save for the retirement of the business owners.

On income sharing
We are particularly worried about the proposal that could make it difficult for small business owners to share income with family members working for them. We do not yet know how far this measure will go, but any changes could make the regulatory burden worse and increase the tax load on owners. The rules may become so arbitrary that many owners may not even bother trying to use this measure.  The support of family members in formal and informal roles is often key to the success of a firm, and any limitations could have significant unintended consequences. 

Passive income savings in danger
We have heard from business owners that having other outside investments in their corporation is often important for many reasons. 

We know it is much more difficult to borrow money as a small business owner. A business’ passive income acts as insurance against emergencies and unforeseen costs. Business owners need to be able to rely on their investments in their business to protect them against the many risks of owning a business.

Also, as business owners do not have the generous pensions available to civil servants or giant salaries creating RRSP room, they need to depend on the value of their business, including any of its investments, for their retirement years. From what we have heard, these changes would come into effect in 2018 and (fortunately) would not be retroactive to past savings.

If you are concerned about these proposed changes to Canada’s tax system, contact your local Member of Parliament and express your concerns. The federal government seems to be fast tracking this process so "sooner the better”. In the meantime, a recent BDO webinar provides excellent background information on this issue.