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Small business’ “Unfair Advantages” likely to be under attack in Federal budget

Income sprinkling and passive business income are Liberal targets


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February 25, 2018 by John Bleasby

It’s federal budget day Feb. 27 and small business owners are sitting tight wondering how their business and tax planning strategies will be impacted over the years to come. It’s been pretty clear from last summer’s consultation papers that the Liberal government feels small business owners enjoy an unfair tax advantage over those they call “ordinary Canadians” — and they want those so-called advantages quashed.

National accounting firm Grant Thornton presented their expectations last week in a document circulated to clients. Here are some of their thoughts.

Income sprinkling in the Liberals’ crosshairs
Small business owners currently have the opportunity to spread what might be a high personal income attributed to one tax payer (the owner) among members of the family in order to reduce the overall family tax burden. The Liberal government doesn’t like that idea, considers it an unfair advantage, and will go after it. How? No one knows for sure. The government put out a draft piece of legislation last summer that was so widely denounced that they crawled back into their holes and tried again in mid-December. The Grant Thornton report says, “It is not clear, however, whether the government intends to introduce additional changes or provide further clarity on the application of these proposed rules.” Unless there has been a major change of heart, expect the Liberals to reach deep into the pockets of small business on this issue.

Passive Income is also a likely target
A small business owner has the opportunity to hold the retained earnings of their company in investments that are taxed at the lower corporate rate rather than at the higher personal rate. This earnings retention and any resultant passive income can be critical, of course, for businesses wishing to develop contingencies for equipment, hiring and training of staff, or business expansion.  However, the Liberal government doesn’t like that idea. “The government stated that it will be designing new rules to limit this tax deferral advantage,” the report says.

The Liberal government in Ottawa is expected to dig deep for more revenue by targeting small business

However, the government has also suggested that any changes would be on a go-forward basis, meaning any investments currently held will be protected, including the future income earned from those investments. Although a $50,000 passive income threshold is anticipated, no effective as-of dates have been announced.

Inter-generational transfers of businesses made easier?
Succession planning for family businesses is a sensitive and important issue for small business owners.  In response to the negative reaction to the government’s July 2017 consultation paper, they now say that they are willing make it less difficult to hand businesses down from one generation another. “The government may provide more details on this in the budget,” says Grant Thornton.

Grant Thornton also points out that in most cases, tax changes announced in a government budget take effect immediately. However as noted above, there may be an exception or two to this. A call to your accountant and/or tax planning expert will be a good idea once details are announced.

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