Has your small to medium-sized business been taking advantage of the “tax loopholes”, as described by the CRA and the Department of Finance in the past, in order to shield your income from high levels of taxation? The latest changes to Canada’s taxation guidelines can affect your financial practices. The Department of Finance, has in its own mind, designed these proposals to enable a stronger, more fair and efficient economy which benefits all Canadians. After over 20,000 submissions were made to the Department of Finance, that described the unfairness of these proposals, the Minister made several announcements, retractions and released new income splitting rules which were watered down from the original July 18, 2017 tax proposals. The tax proposals as they currently exist (pre-Budget) include notable changes and restrictions to dividends, a decline of small business tax rates, and more.
If you are a small to medium-sized business owner who is concerned about your tax-planning strategy or other financial matters relating to your business, our team of experienced financial advisors and chartered accountants in Markham can help. Backed by years of advanced training, technical experience, and financial acumen, our advisory team at HSM LLP uses their expertise in the following areas: taxation, succession planning, accounting, auditing, and consulting to help businesses like yours secure its financial future.
Interested in learning more about how the new changes to the taxation guidelines in Canada? Keep reading for more information:
What are the New Guidelines for Corporate Taxation?
As of January 1st, 2018, the new taxation changes in Canada include:
A Decline in Small Business Tax Rates
In efforts to help reduce the extreme backlash that the Trudeau government received from concerned small to medium sized business owners the Federal Government has reduced the tax rate for small business to 10% in 2018 and plans to lower it even further to 9% by 2019. This reduction is intended to provide small businesses with up to a maximum of $7,500 in federal tax savings each year. However, this knee jerk reaction by the government and the bone that they are throwing small businesses comes with a catch. What’s the catch – The tax rates on dividends from small business will be going up.
However, where a company earns income eligible for the the small business deduction or investment income (not entitled to the lower rates as described above) this is especially unfair. The tax on these types of non-eligible dividend received from a corporations will increase with combined federal/Ontario tax liability from an already high amount of 55.9% to 56.32% in 2018 and 57.13% in 2019 (without taking into account any provincial increases). This would cost the shareholder of the Corporation an additional amount of almost $13,000 for a net cost of approximately $5,500 to the small business owner.
New Rules For Dividends
The Canadian government is now restricting dividends to certain owners of your corporation and calling these restrictions the Income Sprinkling Rules. This means that owners of private corporations in certain circumstances can no longer pay dividends to certain related family member shareholders without being subject to the highest rate of tax.
More specifically, these rules attempt to clarify the process of determining whether a family member is subject to these new TOSI rules (Tax on Split Income) or not. The new rules provide for certain complex exemptions that allow certain family member shareholders to be exempt from the application of these ill advised rules.
Family members who meet these strict exemptions from being taxed at the highest marginal tax rate include:
- The business owner’s spouse provided that the owner meaningfully contributed to the business and is aged 65 or over. Adults aged 18 or over who have made a substantial labour contribution on a regular, continuous basis (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.
- Adults aged 25 or over whom do not meet the substantial labour contribution exemption above and who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation
- Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
It should also be noted that individuals aged 25 or over who do not meet any of the exclusions described above will be subjected to a reasonableness test from the CRA to determine how much income, if any, should be subject to the highest marginal tax rate. Additionally, adults aged 18 to 24 who have contributed to a family business with their own capital will also be subject to use the reasonable test on their related income. I.e. if the adult child put in $100 for his or her common shares they would be entitled to a dividend of $1 per year given the current prescribed rate of 1%.
Do These Changes Affect Your Business?
Yes, if your business is a Canadian controlled private corporation has related shareholders, then the new TOSI taxation guidelines in Canada will likely affect you.
Of Note
The Senate Committee of National Finance issued a report on the same day the revised proposals came out strongly criticizing the Department of Finance’s tax proposals. It is likely that there are more changes to come after the 2018 Federal Budget is released.
Need Help? HSM Offers Tax Planning Services
At HSM LLP, our team of comprehensive financial advisors has the knowledge and experience to help you navigate through these murky, at best, tax proposals, from Canada’s Department of Finance. Many of the rules or application of them are not clear, not consistent and complex to apply… Whether your small to medium-sized business is in need of a comprehensive tax review, an up-to-date business valuation, or tax-planning services, you can trust our advisory team to help you make sound financial decisions.
