Risk of being audited by the CRA means it’s crunch time for new small business rules
Advisors have been urged to stay alert for small business tax filing red flags for 2018.
After new rules were unveiled by the Federal government in this year’s budget, small businesses must stay on top of the changes that could trigger a tax audit when they file corporate taxes after the end of their company’s fiscal year.
In the budget, Finance Minister Bill Morneau scaled back initial changes to the rules on passive investment income, moving to gradually eliminate the amount eligible for the small business tax rate, which is being lowered to 9%, after passive income rises above $50,000 ($5 for every $1 after this amount). The amount eligible is completely eliminated once passive income goes above $150,000 and will instead be taxed at the corporate rate.
The Canada Revenue Agency has also been closely scrutinizing whether small businesses are compliant. According to the CRA’s latest annual report, from 2014-2015 alone, the CRA reviewed 37.472 files from small and medium-sized enterprises and found $1.3 billion in fiscal impact.
Bill Black, wealth advisor at IPC Securities Corp, said advisors don’t have to be tax gurus to avoid the pitfalls but they must know enough to get their business client to meet with their tax professional. He added that taking a “deep dive” into the client’s business structures is vital.
“[They] must make sure their structures are set up properly and that the client is going to get the intended result because they could be quite surprised. And we all know tax surprises are bad, right? They are not good!”
Black also highlighted a few of the bigger potential red flags for business owners.
He said: “If we start off with regular corporations and there are family members who are receiving dividends, then under the new rules, that is going to be taxed at a higher rate and you won’t be able to income split from the corps. The CRA is going to have to be watching that.”
Passive income is another major change, with Black warning that if a company has more than $50,000, it is obviously going to have to be tracked. He said: “You lose $5 for every $1 over 50,000 in any given year, so you lose $5 worth of access to the small business rate. It’s another biggy.”
He added that dividends flowing through trusts, which don’t have the same exemptions as individuals, is another red flag that could result in an audit.
He said: “There is so much more to track now and so many rules that are intertwined. If a client is audited, then the first thing they need to do is contact the tax professional who has assisted them with their tax returns to say, hey, where do we stand? Let’s re-look at this. But as advisors and planners, it behooves us to assist our clients in preparing their structure so that they are in the best place.”