On Wednesday, December 13th, the Department of Finance and Minister Bill Morneau released a final set of clarifications for the Federal Small Business Tax Proposals. As previously covered, these proposals will have a significant impact on businesses that have come to rely on income splitting amongst family members and passive income investment back into the corporation in order to save for retirement, capital upgrades or other downturns. A significant coalition of Chambers, Associations, Doctors and other professionals were united in their opposition to the proposals.

In response to our concerns and recommendations, the government has made several tweaks to the proposals, like the introduction of a $50,000 threshold exemption for passive income and cancellation of the capital gains proposal back in October and a few more yesterday. Some new exemptions or no reasonableness test for income sprinkling will be needed:

• A business owner’s spouse, as long as the owner meaningfully contributed to the company and is aged 65 and older.
• Adults aged 18 and older who have made labour contributions of at least 20 hours per week or about 1,000 hours per year.
• Adults aged 25 and older who own at least 10 per cent of a company that earns less that 90 per cent of its income from providing services and is not a professional corporation.

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The same day, The Senate’s national finance committee issued a report — after a months-long cross-country fact-finding investigation on the proposed changes — demanding the government scrap the proposals or, at the very least, delay implementation until Jan. 1, 2019, a year later than planned. The Canadian Chamber of Commerce had engaged in the process and we’re glad to see their recommendations formed within the foundation of the comprehensive 50 page Senate report. A majority of Senators within the committee were in favour of outright cancellation of these proposals, with two preferring a one-year deferral instead.

Some of the findings within their consultations included:

“…the income sprinkling proposal will be complicated to apply, require significant paperwork, and rely on the subjective determination of tax auditors, inevitably leading to inconsistency and litigation. It also would not recognize legitimate income splitting based on implied joint ownership of family property.

The passive income proposal is based on a one-size-fits-all approach, which would constrain the growth of small businesses and the regular operations of medium and large businesses. It would encourage businesses to take funds out of their corporation and create an uneven playing field with public corporations and non-Canadian controlled corporations.

Removing access to certain tax planning strategies for physicians would decrease their compensation, leading them to reduce their hours, move to another jurisdiction, or retire early, which would negatively affect patient care.”

The Senate report also recommended an independent comprehensive review of the tax system, which is in alignment with the recommendation of the Canadian Chamber Network.

See here for the full Senate report:

See here for media coverage by the Financial Post.

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For more information, please contact: Huzaifa Saeed | t:905-522-1151 ext: 230 | e: h.saeed@hamiltonchamber.ca

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