On December 13, the finance minister finally released his revisions to the bungled small business tax changes he proposed in July 2017 through a baffling and error prone consultation process in the Fall of 2017. Below is my preliminary assessment of these changes. I am by no means an accountant or tax lawyer, but I have sat through enough finance committee meetings and had hundreds of phone calls that I have a good grasp of what some of these changes will mean for small business owners and those who are self-incorporated.
The finance minister is backing off the early draconian targeting of all small business with passive income. Judging from the public information available the following 4 groups are exempt; those over 65 including the spouses who made significant contributions to a business, adult children who work 20 or more hours in a business, adult children who own 10% or more of a family business, and anyone who receives a capital gain from a small business corporation who would not be subject to the highest tax bracket.
The TOSI or income sharing rules that allow a business owner to share some of their income with a spouse in the business are being changed. The Liberal government is scaling back the initial broad tax grab they had attempted to now exclude anyone who makes a regular, continuous and substantial contribution. There is a lack of clarity on what that means. Exemptions will also exist for those with large stakes in a small business corporation. The rules will apply to professional practices, depending on their professional tax structure, including accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors. Small business owners will have until end of 2018 to meet the condition of owning at least 10% of outstanding shares of a corporation in terms of votes and value.
So what is the impact?
Let’s start with the fact that the finance minister ruined summer for small business owners and farmers, and now is seemingly ignoring that these rules require new paperwork and business adjustments to comply in full for the coming tax year. Why you ask?
The Liberal government has clearly stated these rules are effective January 1, 2018. A grinch-like way of saying merry Christmas to small business owners across Canada.
If you do not clearly fall within the 4 exclusions, the so-called bright lines defined by the finance minister, you then have to determine your tax exposure and how to adjust your corporate structure as well as create in certain cases documentation to prove work done by family members, hours of contributions, etc. This requires time and sometimes adjusting schedules or work planes. You just cannot do that 2 weeks from year-end. Its unreasonable.
Lastly, I see here quite a bit of interpretation by the Canada Revenue Agency. The same agency that was directed to extra additional taxes from diabetics with mass refusal of the disability tax credit, considered taxing employee benefits, has audited single mothers for their child benefit cheques as reported by the CBC, and will now be tasked with determining what is a reasonable contribution to a small business. This will result in more stress for business owners, more appeals and eventually more costly litigation at the Tax Court of Canada.
This is my early assessment. The changes the Liberals proposed in July 2017 in the dead of summer were radical in their scope and would have damaged our small business community. This partial climb down and amendments was only thanks to relentless opposition by conservative MPs and the public who revolted against this tax grab.
I am going to continue listening to the tax experts on this as they assess the changes over the next few weeks and months to determine the impact on small business owners as well as future entrepreneurs.
Tom Kmiec, MP
Deputy Shadow Minister for Finance