How Do The New Proposed Tax Changes Affect You



Oh Canada! The True North strong and free!

Do you remember writing a research report for a school assignment?  

• What were the lasting effects of World War II? 

• How did the bombing of Hiroshima change the way the world feels about nuclear weapons?

Here’s a new topic we could add:  How do the new proposed tax changes affect you?

 

If you are a shareholder of a small business or farm corporation, you may be affected by the proposed tax changes brought forth by the Liberal government on July 18th. 

The 75-day consultation period, which ended as of October 2nd, permitted Canadians to share their views on the proposed changes. This excerpt from Bill Morneau, the Federal Finance Minister, appeared in an Open Forum letter published in the Western Producer:

“In all of this, let me reiterate that this is a consultation period, and that we are in listening mode.  If you think these proposals inadvertently affect middle class farm families, we want to hear from you.”

Although the Liberal government received countless requests to extend the consultation period on the tax changes, the request fell on deaf ears. This motion was defeated Tuesday, October 3rd.  

The Government of Canada’s 63-page document, Tax Planning Using Private Corporations, specifically addresses three primary issues: income sprinkling, holding passive investments inside a corporation, and converting income into capital gains.     

Today as I composed my report on the proposed tax changes, I had a knot in my stomach.  As I read through news articles and media posts, I witnessed first-hand the controversy created over the Liberal’s proposed tax changes framed in their words as “tax fairness”.  Many across the country beg to differ, calling the changes anything but “fair”.  

The clients who I have worked with are shareholders in private corporations for both personal and business reasons.  Setting up a corporation was in their best interest in order to have more after-tax income to upgrade or purchase additional equipment and land, fund operating expenses, and save for emergencies and unexpected business problems. In some cases, the cash within their corporate accounts was to fund their retirement, the same way a pension plan would serve a salaried employee.

In the future, my clients would pay their share of personal taxes when funds were withdrawn from their corporation into their personal accounts.  The integration between corporation and personal tax filings assures that income earned through a corporation and paid out as dividends is subject to the same income tax as that earned by salary.

 

Kevyn Nightingale, CPA, CA (ON), CPA (IL), TEP is a Partner and Business Advisor at MNP, LLP.  In his two articles, Private Company Income Splitting Part 1 and Part 2, he clearly defines the current tax law and the proposed law regarding the income splitting proposals.  As a tax professional who understands the proposed legislation, Kevyn makes an astounding comment, “The legislation is conceptually simple, but the devil is in the details, and they are exceedingly complex.  There are 27 pages of new legislation.”

The Income Tax Act has always been complicated and complex. When I checked, the document, amended as of July 1^st, 2017, is 3,128 pages.  And the number of pages is about to increase.  Once the new legislation is passed, owners of small business and farm corporations are encouraged to talk with their tax advisors to fully understand how the new changes will impact them.   An expert who understands and interprets tax laws can educate and provide us with wise tax planning advice.