Proposed rules related to passive investment income could raise their tax bills in 2019
In a letter to Finance Minister Bill Morneau, the Coalition for Small Business Tax Fairness called for changes to new rules related to passive investment income that were announced in the federal budget for 2018.
The coalition noted a previous promise from the government that passive investments that small business hold currently would be grandfathered under the new rules. But under more recent proposals, it said, past passive investments will be used to keep some small businesses from accessing the small-business deduction moving forward. This means their tax bills in 2019 will be raised significantly as they will be taxed at the same rate as big business.
“In the event that passive investment income surpasses the $150,000 mark in a year, businesses will completely lose access to the SBD, significantly increasing their overall tax burden,” the coalition said. “We believe this is unfair to those who have followed the rules and made prudent and appropriate business decisions to create a capital reserve within their business.”
The coalition called on the government to not proceed with the proposed changes to the passive investment rules. If the government felt compelled to proceed, the group said, they asked that it collaborate with the coalition and tax professionals to iron out an eligibility formula that doesn’t include existing passive investments.
Other recommendations by the group were:
- Implementing a more gradual "grind" in eliminating the benefit of the small business tax rate.
- Raising the threshold where passive investment income begins to affect a firm's access to the small business rate from $50,000 to $100,000 to exempt more small firms.
- Indexing the $50,000 and $150,000 exemption limits to inflation to prevent small businesses from being subject to bracket creep on the taxation of their passive investment income.
“The proposed rules penalize businesses that have been compliant with the law and acted prudently in the face of economic uncertainly and risk by creating a capital reserve through passive investments,” said Dan Kelly, president of the Canadian Federation of Independent Business, in a statement. “We're asking the government to keep the promise they made to the small business community and protect firms with previous passive investments from the new rules before the budget is signed into law.”