The new rules for sharing dividends or salaries with family members will have more than just the modest impact government vowed
By Dan Kelly
Published in the Financial Post on September 18, 2018
With an elementary-school-age son, a heavy workload and an often unpredictable travel schedule, I know that I would be lost if I didn’t have a tremendously supportive and understanding spouse (who balances her own full-time work schedule). If asked, I’m sure many working Canadians would report the same.
But for independent business owners, a spouse or partner is something even more.
Running a small business can mean shouldering the burdens and celebrating the payoffs of hard work without colleagues or professional mentors to lean on. Spouses and family members of small business owners frequently become not only their biggest cheerleaders, but also their closest professional partners, in both formal and informal ways.
A majority of small business owners – more than two thirds – employ family members, according to a 2016 CFIB member survey. A separate survey found that more than half of small businesses compensate the owners’ spouses for their contributions to the business – often through a salary, dividends or some combination of both.
Being the spouse of a small business owner doesn’t stop at devoting one’s time and skills to the business. Spouses often have to maintain an outside job to provide stability while the business establishes itself. They might have to take on a greater proportion of the domestic labour, child or elder care, while their partner devotes long hours to running their business. And I’ve met many spouses who have had to step in and run the business when something happened to their partner so they could keep the doors open, the lights on and the employees paid.
Spouses also have to share the uncertainties and the sacrifices owners make for their business – often including the inability to take a family vacation, difficulty qualifying for a mortgage, an unclear financial future, or even family bills going unpaid during bad months.
So it was jarring when the federal government introduced new rules on income splitting late last year, severely limiting small business owners’ ability to include their family members’ contributions in their tax calculations a of Jan. 1, 2018. Even more so because details of the changes were announced only two and a half weeks before they were to come into effect, with next to no consultation and despite protests from business groups, tax professionals and the Senate.
The government claimed the suite of new rules for sharing dividends or salaries with family members would have only a modest impact, affecting a handful of high income earners. Unfortunately, upon greater review, this will affect tens of thousands of independent family businesses. In fact, the independent Parliamentary Budget Officer has estimated that the new tax revenue to government will be two to three times higher than government estimated and noted that it is extremely difficult to determine who will be affected by the new rules.
One of my greatest concerns is that it remains very difficult for any business owner – even for tax professionals – to clearly understand the new rules. A confusing mix of “bright line” and “reasonableness” tests, exemptions for some, but not for others will now be passed to the Canada Revenue Agency to interpret and sort out. And this was all done essentially retroactively, before business owners were able to sort out and make changes to accommodate the new rules. Expect another round of panic among business owners when the audits of the 2018 tax year begin.
What is clear is that it will be nearly impossible for the CRA to sort out all of the formal and informal ways family members are involved in a business. Even family members who are not actively involved in the day-to-day operations are heavily implicated – as risk takers, extra labour, potential successors and investors.
I think back to a lunch I had with a woman whose husband runs a Quebec trucking firm. She told me that while her husband was the president and sole shareholder of the business, she has been keeping a handwritten note in their household safe noting the money she lent her husband to get the business going. I think of the woman I know who suddenly had to quit her day job in Manitoba to lead the family auto-body shop when her husband suddenly dropped dead. Or the husband of the dentist who does the books at home while his wife focuses on running the practice. How CRA will interpret the thousands of unique and often informal roles spouses play over the life of a business is anyone’s guess.
What has gotten lost in the discussion around income sprinkling is who these measures were originally designed to help. These aren’t CEOs of large corporations looking to offload some income on an uninvolved spouse so they can dodge taxes. These are typically long-running, independent businesses in which everyone in the family lends a hand when needed.
The contribution of family members, particularly spouses, should not be erased by a government that hasn’t really tried to understand the reality of running a small business. CFIB is calling on all parties – including the current government – to commit to a full spousal exemption when business income or dividends are shared. The spouses of Canadian small business owners deserve this kind of respect.