Although the recent federal budget was largely a non-event, the government did say it will review a few specific tax policies that could seriously impact incorporated small businesses and high-income earners. With current tax policy south of the border so uncertain, the Canadian government is reluctant to make any changes just yet, but advisors should be keeping a close eye on consultation papers released in the upcoming months.
One change the government alluded to after the budget was the phasing out of the tax deferral opportunity for certain incorporated professionals. Under current laws, small business owners have the ability to defer quite significant chunks when they don’t pay themselves 100% of their organization’s profits. The government has suggested that deferral based tax savings create an uneven playing field and has stated the possibility of restricting access to the small business tax rate.
“Quebec has changed the rules around corporations, such that if you don’t employ at least 4 people or fulfil a set number of hours of labour employment, you can’t access the small business tax rate,” says Jason Pereira
, senior financial consultant at Investment Planning Counsel. “It is a political landmine because every incorporated professional who doesn’t have a full set of employees is going to lose out massively and that has the potential to be politically damning in the next election.”
The government also suggested addressing how small businesses benefit from splitting income within a corporate structure, either directly through shares or via a trust. The tax cutting tactic has been used for many years and nearly every corporate professional in the country would be affected by a change. The CRA deem it to be unfair, but, again, it could be a situation the government wants to stay away from especially when the U.S. is gearing up to cut corporate and personal taxes.
“The government also suggested they’re going to look at the practice of converting income into capital gains in order to qualify for a lower tax rate,” Pereira says. “However, I don’t think that is widespread enough to affect a lot of people. There are a couple of ETFs and corporate class mutual funds that have the ability to make that conversion, but, from the wording the government published, I don’t think they’ll be focusing on those investment products.”
It’s unclear what exactly will be changed (if anything at all) and Pereira encourages small business owners to wait for the consultation paper and to then assess the potential impact of any tax reform. “Everyone is panicking but we don’t yet know which way the winds are going to blow,” he says. “Advisors should stay informed, not make any assumptions and be ready for the consultation paper when it comes out.”
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