Will new passive income rules be beneficial to businesses?

How will the new rules affect small businesses with ambitious growth strategies?

Will new passive income rules be beneficial to businesses?
The amendments by the federal government to passive income rules may not be enough to meet the needs of small firms wanting to grow.

Canadian Federation of Independent Business (CFIB) president Dan Kelly said the said rules might hamper and discourage the growth potential of small businesses.

Finance Minister Bill Morneau announced the revised changes to the rules, noting that small businesses will be given a $50,000 annual threshold on passive investment income.

"If administered properly, this change will be helpful in allowing many small firms to continue to use passive income to ride out challenging times, save for investments or set aside money for a leave or retirement," Kelly said.

However, this threshold is deemed to be too low for small firms saving to grow and get to the next level.

In a report on CBC, Morneau was quoted saying that many businesses are utilising their corporations to save for the future by making passive investments.

"For the vast number of corporations, this isn't a problem. But in a very small number of cases, it gives wealthy people an unfair advantage over and above everyone else," the minister said.

Based on government estimates, up to $300 billion in assets are stored in the passive investment accounts of just two percent of all private corporations.

"This is money that's not being invested into active businesses, and it is money that's generating an additional $20 billion a year in passive investment income," Morneau argued.

Still, Kelly said CFIB will continue to seek more clarity about how the changes will be implemented, including whether the threshold will be indexed to inflation.

"These are incredibly complicated tax changes with many potential unintended consequences. When the entire package of revised proposals is out later this week, we will review them with tax professionals to provide an overall assessment on the net impact for Canada's small business owners," he said.

For more of Wealth Professional's latest industry news, click here.

Related stories:
Small businesses need a capital assist: IIAC head
Federal tax proposals overlook small-business realities: CFIB