Finance Minister Bill Morneau’s recent announcement on proposed changes to corporate tax regulations sent waves throughout the business community. Widely publicized as a “closing of loopholes” in the name of equity for all Canadians, this language is actually a misrepresentation of current tax allowances and has been considered an affront to many hardworking business owners, medical professionals, and their families.
The current system was organized as it is with good reason. It took years of careful research and consideration, many proposals, debate, and revision to get where we are today. There are protections in place to avoid abuse of the current tax system, and for the most part, they work. Any labeling of any of the proposed changes as a ‘protection’ or ‘benefit’ to Canadians is not completely accurate. In fact, these changes are making it more difficult for hard-working Canadians to run a thriving business – particularly when family is involved.
The proposed changes are lengthy and complex, but will primarily affect income splitting, capital gains, trusts and investment holding companies. Tax rules that were formerly reserved for underage family members will now be extended to spouses, siblings, adult children and the like. Dividends will end up being taxed at the top personal rate, eliminating the benefit of income splitting between family members. A new reasonableness test has been proposed, though a sufficient test already exists. Now, proposed regulations specify firm rules based on both age and the amount of regular involvement in business activities. Capital gains exemptions will cease or be further limited, affecting family trusts. There will be issues relating to election and apportionment methods in the use of holding companies. The list goes on, and cannot be summarized in a single article or blog post – subsequently, we ask that you direct all questions to our team, so we can provide personalized, thorough answers.
The actual result of these measures will not be equity – it will be a disservice to small business in Canada, and all those who have worked hard to build wealth through hard work and entrepreneurship. Additionally, with taxes coming down in the neighbouring United States, it’s possible that the proposed Canadian regulations will result in a surge of Canadian doctors, dentists, pharmacists and other professionals heading south, where they can keep more of their money. In this scenario, all Canadians lose out. This is not equity – this is poor planning with clear negative implications.
Many in the small business and wealth management world feel that these changes are happening too quickly and without considering the potential fallout. Similar amendments to tax laws in the 1960s and 70s took years of planning, consultation, and implementation. Morneau has already prepared legislation and proposed a 75 day consultation period – far too short, given the extensive nature of the proposal.
While we are not pleased by the announcement, we will plan for these changes in the best interest of our clients. There is no need to panic or make dramatic changes to your investments – more so, a shift in strategy may be required if and when these changes are put into effect. Our team will be well prepared for such an event. If you have any questions about your investments, taxes or retirement plans, please contact us. We’d be pleased to speak with you.