When Ottawa first announced its proposed small-business tax changes
, they were blasted for being unreasonable
. The proposals have since been relaxed somewhat, but questions are still being raised — not just by business owners, but also by chief justices.
The current chief justice and a former chief justice of the Tax Court of Canada are saying that the so-called “reasonableness test” in the proposed tax changes could lead to a sizeable wave of new appeals — a considerable risk to a court system that’s already drowning in cases.
“[I]t’s going to be a battle between the CRA [Canada Revenue Agency] and the taxpayers as to what ‘reasonable’ means in various situations,” former chief justice Gerald Rip said in an interview with the Financial Post
. That battle, Rip warned, could very well translate into a larger case load for the Canadian tax court — especially as the CRA is already facing processing delays
caused in part by a record number of appeals.
The reasonableness test is meant to restrict businesses’ ability to spread income among family members. It looks at capital and equity contributions, labour contributions, assumed risks, and past contributions made by family members to determine their right to earn income from a business.
“It’s very subjective and very open to litigation,” Rip said.
Sharing the sentiment is current Chief Justice Eugene Rossiter, who made similar statements at an event hosted by the Canadian Tax Foundation in November. According to one attendee interviewed by the Post,
Rossiter warned that “litigation will ensue” from the changes. He also said “access is going down, and stress is going up” for people involved in Tax Court of Canada proceedings due to rising appeals and a lack of resources.
Also problematic is the fact that the court is facing a shortage of judges. Currently, there are 23 judges who, unlike those from other courts, have to travel to 59 communities around Canada to hear taxpayer appeals. The deficiency could force the tax court to decrease the frequency of hearings as well as limit the number of locations that will be visited.
“[Rossiter’s] comments were very open and honest, and there was a sense of frustration,” said another attendee of the Canadian Tax Foundation event.
The tax changes are set to take effect in early 2018, but business owners have already issued one appeal. In advance of a meeting of federal and provincial finance ministers yesterday, the Canadian Federation of Independent Business urged provinces to push for the implementation of new income-sprinkling rules to be delayed until January 1, 2019.
“The new rules to the way small business owners share income with family members may require changes to existing business structures and there will be no time to make any of this happen before year end,” said CFIB president Dan Kelly.
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