Canadian Contractor

Ottawa’s plan to close “loopholes” in professional corporation tax rules

Let us know if you think you will be affected.

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September 8, 2017 by Steve Payne

We had a question from Bob in British Columbia, who runs a small contracting firm in which one his partner’s wives makes a thousand dollars a month doing the books. He asked us, will his firm get badly hammered by Federal Finance Minister Bill Morneau’s plan to tighten up on tax breaks for professional corporations?

Here is our reply…

Bob, thanks for your question. The Federal Government is currently in a “consultation” period until October to tweak Finance Minister Bill Moreau’s plans to close “loopholes” in the tax code that allow self-employed individuals (largely professionals, such as doctors and lawyers, but also farmers, business people and – yes – residential contractors) with inherent tax advantages.

One of the biggest advantages of a corporation for a small business person is the (quasi-offside, depending on the specifics) ability to engage in “income sprinkling,” in which the income of the business is attributed to individual family members – who may not actually be working in the business itself (different from the situation apparently in your firm, in which the family member DOES legitimately work in the business). Morneau’s plan seeks to stamp this out, among other changes. Critics of Morneau’s plan counter that there are already plenty of rules in place to prevent illegal types of income attribution.The Liberals say that some 50,000 families in Canada engage in illegal income sprinkling, depriving Ottawa of some $250-million in income taxes.

Another “loophole” the Morneau’s plan aims to close, is the building of various investment vehicles within private corporations, allowing the owner “passive income” from these investments, when the money is not really building the main business, but is merely stashed inside it to benefit from lower (capital gains, rather than income) taxes. If held outside the business, this money would be subject to RRSP contribution limits and, above that, taxed at the personal rate. Obviously, the Liberals want to grab that money, too. How many residential contractors have significant investment vehicles within their contracting firms? We don’t know.

If you do benefit from these tax reduction strategies, you will definitely want to be talking to your accountant about your options. But we need to see the actual final proposals from Morneau. In the meantime, let us know how you think you will be affected. You can post using a “stage name,” of course. And your identity will never be divulged to our friends at Revenue Canada.

Steve Payne

Steve Payne

Steve Payne is the editor of Canadian Contractor magazine

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2 Comments » for Ottawa’s plan to close “loopholes” in professional corporation tax rules
  1. Disgruntled says:

    This is literally robbery. They will force a business owner basically to declare all income/profit from the business as his salary. They do not allow for boom and bust scenarios. Suppose you have a great year, you pay yourself a modest salary. Business declines, you continue to pay yourself a modest salary even though the business isn’t as profitable. Yes it is a holding vehicle of sorts but businesses don’t always have profitable years and they need to ‘save for a rainy day’. Something governments are not aware of since they tax at will.

  2. Bob Young says:

    I operate 2 small businesses and feel the government and both Morneau and Trudeau are completely out of touch.
    First, they receive more than adequate compensation for ruining our country while their money is safely sheltered. It is do as I say and not as I do.
    Families of small business owners contribute much more to the business simply from being just that – Family. They go through the rough times as well as good. They are invested through their parent business owners who often have to pay employees before paying themselves which often leave the children doing without during their young years. How fair is that when the government state these business owners are tax cheats and have special benefits that a simple working employee has for granted. The business owner is at a disadvantage. He or she invests heavily in their business both financially and in equity sweat that the employee never sees.
    The business owner works often 16 hour days at maybe $2 per hour after all is said and done and can’t argue the minimum wage issue. If he or she has a bad month, then they go hungry. The employee gets his or her paycheque every pay period without issue.
    The changes proposed would mean in some cases us paying 73% taxation. Why should I sweat out my business so much to pay for these politicians who live in a bubble saying that this fair.
    I have worked for all of my life and not had a holiday since 1972 and see Trudeau throwing money away on holidays like it’s smoke in the wind. Seems every time I get a break I cant take time off as I have to put on my sales hat and go after more business to keep my head above water. I can’t take time to have a holiday or I go hungry and my kids suffer too. They are invested simply because they are family so no one can say they don’t contribute. Employees never have this problem. Neither do politicians when they simply vote themselves a raise when they want one and have indexed pensions. Oh I almost forgot to mention, I can’t afford a pension and now they want to take even more away from me.
    I will have to close one of my businesses and lay off people. I won’t be able to sustain the business and keep employing people. The other business does make some money in building computer programs and maybe I should be considering a move to a better jurisdiction or just sell it to a contact in the States who will be hiring US staff instead of Canadians. Trump is after all saying he is going to drop the tax to 15%. To me it is a no brainer.
    Morneau and Trudeau can screw small business into the death of the Liberal Party come the next election but then it will be too late and the damage will be done. They will never be held accountable for ruining so many people’s lives by their penchant for throwing money away while taxing people to death to try and pay for it. They call that FAIR.
    They should be held accountable for their actions and penalized accordingly for the ruin they cause.
    I didn’t vote for this government and I will never vote for them.
    I have no confidence in this government in its ability to do anything right..