When tax code changes are discussed, Canadian businesses are often a part of the conversation. Recently, they have come under discussion again, as new tax changes are being proposed by the federal government. Canada’s Finance Minister posits that those who incorporate themselves draw income from their businesses, allowing them to pay lower corporate taxes. He is now proposing to close loopholes that allow these businesses to benefit from lower taxes. The proposed business law changes from Ottawa would address the growing number of incorporated professionals in Canada.
There is currently a 37.2 percent gap between income taken from a business and traditional income. The Finance Minister seeks to address this by removing certain alleged loopholes in Canadian tax and business law. One practice he has pointed out is so-called “income sprinkling,” wherein business owners distribute money to lower-earning family members in order to pay a lower tax rate.
Critics say that these steps may hurt family businesses. In response, the finance minister has proposed a test, wherein an investigation will determine if the family member legitimately works at the business and can lay claim to profits. Finance Canada has estimated that this change will affect 50,000 Canadian families but believes it is important to make the system fairer.
The government will be consulting on the proposed measures for 75 more days, after which they will introduce the legislation to Parliament. Among the proposed measures is an attempt to stop individuals from claiming regular business income as capital gain and paying lower corporate taxes on personal investments.
Owners of family businesses and corporations may be concerned about how these proposed business law changes will affect them. As with any new legislation or major business decision, it is a good idea for business owners to seek advice from someone familiar with the current and proposed laws. As these proposals solidify into bills, having the perspective of a lawyer is advised for anyone affected.
Source: CBC News, “Morneau proposes tax changes to close loopholes for wealthy“, John Paul Tasker, July 18, 2017