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Federal Liberals’ “consultation period” on small business tax hikes ends in 3 days

The Liberals have argued that it is only the rich who are targeted under this draft legislation. Contractor associations in our industry disagree.


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September 29, 2017 by Steve Payne

The federal government is moving ever closer to passing legislation that will change the way small businesses – and a significant number of well-run contracting firms – are able to do tax planning.

Officially, Monday (Oct. 2) is the last day before Federal Finance Minister Bill Morneau and his department begin to write the final of three pieces of legislation that will upend the way Canadian entrepreneurs are able to use professional corporations to defer or minimize taxes on their earnings/profits.

While doctors have been the one self-employed profession in Canada that has a high profile during the controversy around the proposed changes, there are many contractors, architects and other self-employed individuals in our industry who will be affected by Morneau’s plan.

There are three major parts to the overall plan.

First, “income sprinkling” will be much more difficult, if the legislation passes as proposed. Income sprinkling allows a business owner to attribute income to family members – who may not be involved in the business in a real way. Morneau’s plan foresees methods to determine if an individual is really working in the business. Many tax experts agree with this part of the draft legislation and it very well could be enacted without changes.

The government also wants to eliminate the well-known legal accounting method of converting retained earnings (profits) into dividends and capital gains, avoiding or deferring paying business taxes on those earnings. This part of the legislation has also been drafted.

The third part of the legislation, how “passive investments” are treated under tax law, is yet to be written. A passive investment is an investment within a business that is not really an investment in the business itself, but simply using the professional corporation as a holding vehicle. For example, an investment is considered to be “passive” if the corporation owner ploughs retained earnings/profits into investments like bonds, equities, real estate, etc. that are not part of the operating business per se, but held within it to defer tax – possibly for a long, long time. Business groups who have made representations to the Finance Department on this topic have pointed out that a business needs somewhere to safely store profit, that is tax deferred, other than through personal income tax devices like RRSPs – and passive investments provide this.

For more on the Morneau tax plan, see our story from last week here.


Steve Payne

Steve Payne

Steve Payne is the editor of Canadian Contractor magazine
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3 Comments » for Federal Liberals’ “consultation period” on small business tax hikes ends in 3 days
  1. Anne says:

    As well as contractors, and doctors, all small businesses, including small farmers will be hit by this. We have a family who run a small operation,
    even the kids pitch in with feeding calves, etc. Does the Liberal government want to put an end to the many small businesses operated by families? Does this remind anyone of Trudeau Sr.?

    • Steve Payne says:

      Thanks for your comment, Anne. The voices of farmers have not been as prominent in this debate as the voices of doctors, which the Liberals probably are enjoying – portraying this as “leveling the playing field,” blah blah. As a farm family, who is speaking up for you – which organizations, which associations, and which politicians?

  2. As a small business owner I wish to express my outrage on this attack on small businesses. I will give you an example of how my company would’ve been affected if these rules were in place 11 years ago. Eleven years ago we purchased two small companies that we used retained earnings accumulated over many years to add to our company because at that time we had one client representing 80% of our business and if that client had left we would’ve been out of business. As it happened the 2007 recession came about right after we made the purchases and did significant damage to our company and back in 2011 that large customer did leave us and if we had not purchased those companies with those retained earnings those years ago we would’ve gone out of business for sure.

    Today we have aproximately 25 employees and business is always difficult and if this attack on small business occurred those years ago and we were not allowed to use retained earnings that we had accumulated over the years we would not be here today.