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Morneau fiddles while taxpayers burn
11/24/2017 9:01:42 PM
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By Knowledge Bureau  | Tuesday, October 24, 2017


 

TAX PLANNING FROM THE KNOWLEDGE BUREAU



By Evelyn Jacks

Faced with widespread backlash from professionals, farmers, and small business owners, Finance Minister Bill Morneau has backtracked on a few of the Finance Department’s controversial tax reforms for private corporations, tinkering with some of the proposed changes and adding a tax cut of $2.9 billion over the next five years to douse the flames of discontent. However, family businesses will continue to face tax risk and uncertainty due to a “reasonableness” test – albeit a simplified one – that will limit income sprinkling to contributors of labor, risk, or capital in the business.

Acknowledging the fact that the Canadian economy is growing faster than it has for a decade, with over 400,000 jobs created in the last two years, the government continues with the narrative that the benefits of that economic growth have not been evenly shared. (One could perhaps counter that neither have the risks).

It again points out the real issue that started this initiative: Should significant growth in private corporations continue, the personal tax base will weaken, and that will have the effect of increasing taxes for unincorporated taxpayers. It points out that 80% of passive investment income is earned by private corporation shareholders who make more than $250,000, perhaps providing a clue to some upper income taxation measures to come.

The government also stands firm in its commitment to limit income splitting to family members who are not active in the family business and to tax dividends received by non-active family members to high marginal tax rates, based on a reasonableness test that requires a demonstration by adult family members of their contribution to the business based on any combination of the following:

* Labor
* Capital or equity
* Financial risk – such as co-signing a loan and/or
* Past contributions of labor, capital or risk

The burden of proof will rest with the family based on a “reasonable” contribution to the business. This reads much the same as the mind-numbing detail in the original proposals, although simplification of that burden is promised.

On the good news side, the government will not move forward with proposed changes to the Lifetime Capital Gains Exemption. That should ease concerns about intergenerational transfers.

And then there is the sweetener: a proposed reduction in the Small Business Tax Rate. This will bring the average federal-provincial-territorial rate down to 12.9% on the first $500,000 of active business income earned by small business corporations. The rate was supposed to be reduced to 9% from 11% in 2015, which was part of an election promise not to undo the former government’s intent. However, the rate was frozen at 10.5% effective Jan. 1, 2016, when this government came to office. Now, the proposal is that effective Jan. 1, 2018, the rate will go down to 10% for 12 months, and then drop to the 9% rate on Jan. 1, 2019.

Draft legislation is expected in the next several weeks, with implementation dates of Jan. 1, 2018.

Evelyn Jacks is the founder and President of Knowledge Bureau. This article originally appeared in the Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All rights reserved. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Her latest book, Family Tax Essentials, is now available.

Notes and Disclaimer

©2017 by Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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