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. While some proposed measures were taken off the table (which is good news), and one old promise was reinstated, other changes were only slightly adjusted and may still be a concern for those business owners that use them.
Here are the proposed changes as they stand now:
Income-splitting: added red tape for family businesses
Currently, business owners can 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 said that it will 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 small business owner, you are able to keep certain investments in your business in order to set money aside for business investments, emergencies or your retirement. The government will apply higher tax rates to income over $50,000 from these passive investments, but the small business rate will continue to apply to annual passive income up to $50,000 (equivalent to $1 million in savings, based on a nominal 5% rate of return).
While the government says that this change will only target the very wealthy, this threshold may be too low if your business is saving to grow and get to the next level.
Further details on these changes are expected in the 2018 Budget.
Capital gains: more work to be done
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 are ready to work with the government to find solutions to make intergenerational business transfer less costly and difficult.
Keeping its promise to reduce the small business tax rate
During the last election campaign, the government had promised to reduce the small business tax rate to 9%, but then rescinded this commitment in the 2016 Budget. Finally, they are making good on their promise and have said that they will reduce the rate to 9% by January 1, 2019!
How we got here
In the months following the announcement of the tax proposals, CFIB mobilized to fight for your business. Here are some of the ways we pushed back:
- Forming a coalition with nearly 80 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 - 75 members and counting!
- Advocis – Financial Advisors Association of Canada
- Agricultural Manufacturers of Canada
- Alberta Aerial Applicators Association
- Alberta Enterprise Group
- Alberta Roadbuilders & Heavy Construction Association
- Association des professionnels de la construction et de l’habitation du Québec
- Association of Consulting Engineering Companies
- Association of Professional Canadian consultants
- Association of Tax and Accounting Professionals
- 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
- Family Enterprise Xchange
- Fédération des chambres de commerce du Québec
- Federation of Mutual Fund Dealers
- Federation of Ontario Law Associations
- Grain Farmers of Ontario
- Grain Growers of Canada
- 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 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
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;
- Do not move ahead with the $50,000 threshold on passive investment income. If the threshold goes ahead, it should be increased to $250,000.