Do you have a business? A company? A family trust? All of the above?
If so, recent announcements made by the federal government could result in tax changes being implemented in 2018 that will affect you, your business, your company and your family.
In July of 2017, the Federal Government announced potential taxation changes that will affect individuals who have their own company. In short, the announced potential changes have been targeted to:
- Prevent Income “splitting” or “sprinkling”;Reduce the ability to obtain the small business tax rate on “passive income”;
- Reduce the ability to obtain the small business tax rate on “passive income”;
- Adjust eligibility for a portion of the lifetime capital gains exemption; and
- Prevent the conversion of income into dividends that would be taxable as a capital gain.
Of the four tax changes noted above, the first two will likely have the most direct and immediate effect on island business owners and taxpayers if enacted depending on the nature of your business and your future plans (i.e. succession to the next generation vs. a new start-up company). Additionally, you should be aware that these changes will affect a large majority of business owners, including farmers, fishers, independent truck operators, tourism operators, etc.
Current tax laws contain provisions relating to the distribution of income from a company to family members by way of salary, wages or dividends and is generally referred to as income splitting or income sprinkling. When income is distributed in such a manner, and in accordance with existing tax laws, the result is a reduction in the total taxes payable to the Government. However, the recent announcements look to expand upon the existing rules by applying a “reasonableness test” for payments made to adult children. Essentially, a child’s contribution to the business would have to be evaluated to determine the income given to that particular adult child is reasonable. For business owners, measuring an adult child’s contribution and efforts towards a family business could prove to be somewhat problematic, and ultimately costly, should the federal government disagree with the income distributed to an adult child based on its own view of the “reasonableness test”.
While tax rates vary from province to province, for companies who qualify, they essentially pay a tax rate of approximately 15% (as the federal tax component) on the first $500,000.00 of qualified business income. Currently, if a business owner does not need to take all of this income out of the company, they can benefit by investing this income inside the company as opposed to taking the income out of the company (either by way of a dividends, wages or salary) and defer paying additional taxes on the income until it is removed from the company. If the proposed announcements come into effect, this current benefit will be significantly adjusted, such that income tax will have to be paid at a higher tax rate, even if the income is not distributed and remains in the company.
If you are a small business owner, and if you have ever distributed income to your family members by way of wages, dividends or through a family trust, or if you have ever invested money within your company, as opposed to taking it out for personal use, these proposed changes will affect you if they are enacted. The changes noted above do not present an exhaustive list of the potential effects of the proposed legislative amendments, and as such, you should continue to monitor these developments and speak with your professional advisors prior to 2018 so that you are prepared and have planned for these changes should they become law. For legal advice and options, please contact one of Key Murray Law’s experienced business law lawyers.
Legal information appearing in this article and elsewhere on Key Murray Law’s website is intended for informational purposes only and is not intended to substitute for or replace any legal or other professional advice. If you have specific concerns or a situation in which you require legal advice, you should consult directly with one of our lawyers.