In the summer of 2017, the federal government proposed the most drastic overhaul of the tax system in decades. These changes would have hurt small business owners by increasing your tax burden and adding complex red tape—so we fought back, and so did you.
In reaction to pressure from CFIB and small business owners like you, the government announced that it would make some adjustments to the sweeping tax changes it proposed, and then made further changes in the 2018 budget. There was some good news as some proposed measures were taken off the table and the government reinstated its promise to lower the small business tax rate. But other changes may be a concern for you if you use them in your business.
Here are some of the major changes:
Income-splitting: added red tape for family businesses
In the past, business owners could lower their taxes by sharing income (salaries, dividends) with their family members. The government announced new rules around income-sharing that are in effect as of January 1st, 2018 for the 2018 tax year and going forward.
These changes mean that your business will face more red tape if you employ family members. You will now need to meet a “reasonableness test” to prove to CRA that your family has made a meaningful contribution to your business through labour or property, or by assuming risks. Though the government says this test will be simple for business owners, it does not reflect the many formal and informal ways family members contribute to a business. You can see CRA’s guidance on how they will apply the new rules here.
The government did not create new rules around family members splitting the Lifetime Capital Gains Exemption (LCGE), something they had said they would do in the original proposals. This is good news if you’re looking to sell your business to retire.
Passive income: new taxes on some savings in your business
As a business owner, you are able to keep certain investments in your business in order to set money aside for things such as investments in your firm, emergencies or your retirement. Starting in the 2019 tax year, the government's new rules will gradually reduce your access to the small business tax rate if your business has over $50,000 in annual income from passive investment (which is equal to about $1 million in total investment holdings earning a 5% rate of return).
For every dollar of investment income above $50,000, the small business deduction limit will be reduced by $5. This means that if your business has more than $150,000 in annual passive investment income, you would lose access to the small business tax rate and you would have to pay the regular federal corporate tax rate of 15% on your active business income. The chart below illustrates how this would look depending on the level of passive income you make annually.
Source: Department of Finance, Budget 2018
Although the government didn’t completely scrap the changes to passive investment income, the new rules are much simpler and will impact fewer businesses, compared to the proposals announced in July. However, the new rules will not allow for the “grandfathering” of past investments which had been included in the earlier proposal, meaning your past investments will count against the small business threshold starting in 2019.
The government had planned to restrict your ability to convert income into capital gains. This would have made it more difficult for you to retire and sell or transfer your business to your kids.
The good news is they have announced, after months of nonstop pressure from CFIB and owners like you, that they will not be moving forward with these changes!
While this is a positive step, it still remains more expensive and complicated for you to sell your business to your kids than to a third party. We will continue to work with the government to find solutions to make intergenerational business transfer less costly and difficult.
Keeping up the fight for tax fairness
We have come a long way from the original proposals, but the changes may still have a negative impact on your business. That’s why we’re still pushing the government to:
- Delay implementation of new income-splitting rules until at least 2019, so you have time to prepare;
- Exempt spouses from the income-splitting test, to recognize the crucial formal and informal roles they play in your business;
- Ensure that previous passive investments are protected, as was promised in the earlier proposals.
We are also urging the provincial governments to not move forward with similar changes to passive investment income that would reduce access to the provincial small business tax rate.
How we got here
Since the announcement of the tax proposals, CFIB has mobilized to fight for your business. Here are some of the ways we have pushed back:
- Forming a coalition with more than 70 associations in all sectors of the economy. CFIB is a leading member of the Coalition for Small Business Tax Fairness, which has publicly called on government to drop the proposed changes.
- Wrote and met with MPs and Cabinet to tell them how these changes will hurt our members, urging them to reconsider. We sent 22,500 Action Alerts opposing the unfair overhaul to MPs.
- Participated in the consultation. You can read our submission to the Department of Finance, which was informed by your input. We also testified before the Commons and Senate finance committees.
- We made a lot of noise in the media, with publications or news releases almost every week. Read our op-eds in the Financial Post, Winnipeg Free Press, Huffington Post and Globe and Mail.
Coalition for Small Business Tax Fairness - 73 members!
- Advocis – Financial Advisors Association of Canada
- Alberta Aerial Applicators Association
- Alberta Enterprise Group
- Association des professionnels de la construction et de l’habitation du Québec
- Association of Consulting Engineering Companies
- Association of Professional Canadian consultants
- British Columbia Real Estate Association
- Canadian Advanced Technology Alliance
- Canadian Aerial Applicators Association
- Canadian Association of Farm Advisors
- Canadian Association of Management Consultants
- Canadian Association of Optometrists
- Canadian Association of Radiologists
- Canadian Bar Association
- Canadian Bison Association
- Canadian Cattlemen’s Association
- Canadian Chamber of Commerce
- Canadian Dental Association
- Canadian Electrical Contractors Association
- Canadian Federation of Apartment Associations
- Canadian Federation of Independent Business
- Canadian Franchise Association
- Canadian Home Builders' Association
- Canadian Institute of Financial Planners
- Canadian Institute of Plumbing and Heating
- Canadian Institute of Steel Construction
- Canadian Meat Council
- Canadian Medical Association
- Canadian Mortgage Brokers Association
- Canadian Pharmacists Association
- Canadian Pork Council
- Canadian Produce Marketing Association
- Canadian Real Estate Association
- Canadian Roofing Contractors’ Association
- Canadian Taxpayers Federation
- Canadian Veterinary Medical Association
- Canadian Water Quality Association
- Chinese Business Chamber of Canada
- Coalition of Ontario Doctors
- Conference for Advanced Life Underwriting
- Conseil québécois du commerce de détail
- Electrical Contractors Association of Ontario
- Equipment Dealers Association
- Family Enterprise Xchange
- Fédération des chambres de commerce du Québec
- Federation of Mutual Fund Dealers
- Federation of Ontario Law Associations
- Grain Farmers of Ontario
- Greater Vancouver Board of Trade
- Heating, Refrigeration and Air Conditioning Institute of Canada
- Institute of Communication Agencies
- Institute of Advanced Financial Planners
- Independent Financial Brokers of Canada
- Mechanical Contractors Association of Canada
- Merit Canada
- Ontario Agri Business Association
- Ontario Association of Radiologists
- Ontario Medical Association
- Ontario Real Estate Association
- Ontario Restaurant Hotel and Motel Association
- Opticians Association of Canada
- Private Capital Markets Association of Canada
- Progressive Contractors Association of Canada
- Quebec Association of IT Freelancers
- Quebec Association of Pharmacist-Owners
- Quebec Hardware and Building Supply Association
- Resorts of Ontario
- Restaurants Canada
- Retail Council of Canada
- Saskatchewan Stock Growers Association
- Western Canadian Wheat Growers Association
- Western Equipment Dealers Association