Recently, the Canadian federal Finance Minister announced a draft of new legislation which would greatly impact farmers and business owners in Canada regarding current and future tax laws. While the new legislation aims to correct some of the inequities in Canadian tax code related to business corporations and entrepreneurial ventures, it also has significant impacts on multiple facets of business structure and future planning.
The four main areas in which business owners and farmers can expect to see changes are:
- Income Splitting
- The Lifetime Capital Gains Exemption
- Tax Treatment of Passive Investment Income
- Income Conversion to Capital Gains
To start, if you use income splitting as a tax strategy for your business that includes your family members, there may be new tax regulations that include heavier tax burdens for family members who are share holders over the age of 18. While minors under 18 are currently held at a higher margin for taxation, the new legislation would increase taxes paid for adult family members who are part of your income splitting strategy. An exception to this increased tax requirements is a “reasonableness test,” which will determine if the amount paid to a family member by your business is the same as what would be paid to a non-relative in the same position.
Secondly, while multiple family members can currently use their Lifetime Capital Gains Exemption on the sale of a family business, the proposed new legislation may deny requests to use the exemption in the following cases:
- A family member is under the age of 18
- Trust beneficiaries who want to use the capital gains exemption on the accrued value of shares while part of the trust
- Individuals who want to make use of the exemption but are subject to the tax on split income.
Thirdly, over the past several decades, businesses have typically been taxed at a lower rate than individuals who earn business income. With the new tax legislation, business owners would now be taxed differently when using earned income as a passive investment strategy. This is in an effort to encourage business owners to invest earned income back into the business, rather than as passive investment income for personal gain.
Lastly, the new proposed legislation aims to shut down the option for shareholders to extract earnings from a corporation as a capital gain, rather than as a dividend. While this is a less common tax planning alternative, it affects shareholders because capital gains are taxed at a lower rate.
So, where do business owners and farmers go from here?
The Department of Finance has given Canadians a short window of time to raise your issues—this must be done by October 2, 2017. It is important to remain informed and discuss your concerns with your MP. Lobbying efforts up to the October 2nd deadline are critical at this stage to shape the tax issues surrounding your business.
At BlueRock Wealth Management, we always strive to stay abreast of any changes that may affect your ability to manage your wealth as an individual or for your business. In Part Two of this blog series, we’ll discuss planning strategies for business owners and farmers who may be affected by one or more of these new tax implications.