Bonnie Nash of Nash/Giroux LLP did an update on federal tax changes at a Business Support Network meeting in Slave Lake last month. The Leader was unable to attend, but Nash provided the following details from her presentation.
On July 18, 2017, the federal finance department issued draft legislation that would fundamentally overhaul the tax system for privately owned companies and their shareholders. Submissions had to be made by October 2, 2017 which after a short perusal, the government issued responses.
Here is a brief summary of what these changes entail.
Increasing the tax on passive investments
The government feels the current system of taxing investments in corporations provides an unfair advantage to corporate owners compared to salaried employees.
The proposals include eliminating the portion of the taxes that were previously refundable and eliminating the tax-free portion of any capital gains that can be paid to the shareholders tax free.
In response to submissions, they have proposed that the new tax will apply only to new investments on a ‘go-forward basis’ and will only apply to passive income that exceeds $50,000
They anticipate releasing draft legislation with the March 2018 budget, so as of right now there are still many questions on how it will be applied and its effective start date.
Proposal to decrease and increase taxes
The government has proposed to decrease the tax paid by small business corporations from its current 10.5 per cent to 10 per cent, starting January 2018, and nine per cent beginning January 2019. What we don’t know is if the provincial tax will change in response.
In order to preserve integration, which is ensuring salaried employees and corporate owners ultimately pay the same amount of tax, there will need to be some tweaking to increase the way dividends are taxed personally.
The July 18 draft legislation intends to increase the application of the tax on split income; taxation at the top tax bracket, to any individual receiving dividends from a corporation where the amount received may be considered unreasonable.
To determine reasonability, the government proposes to take into account the amount of risk taken, capital contributions to the business and time spent in the day-to-day operations of the company.
The government has indicated that the proposed measures to determine reasonability will be simplified; however, no further details have been provided.
These rules were to be effective as of January 1, 2018, so this year is the last to fall under the old rules and you might want to consider paying out dividends prior to this date.
There may still be a potential that the government will continue with the proposal to tax capital gains as though they were ordinary dividends, which has the potential of increasing taxes on capital gains by up to 17 per cent.