Here's what you need to know about the new proposed tax changes and how they’ll affect your small business. With the Canadian federal government changing its tune day by day during Small Business week, a few weeks back, business owners are concerned, were concerned or they’re not sure if they should be concerned! With over 21,000 submissions from Canadians during the consultation period, it’s definitely on people’s minds. I was happy to chat to a crowd of seasoned entrepreneurs at Allan Financial Happy Friday Gathering to talk about these tax changes and how they’ll affect small businesses. Here’s a couple of the hot topics we discussed...

 

Income on Passive Investments

In terms of passive investments held in companies, the existing rules will apply to annual passive income of up to $50,000 (about a 5% return on $1 million of savings) and any income from any passive investments already in there will be grandfathered in too. Let’s think about this, when a business owner (after taking all those risks, creating employment, with no pension income, and likely limited CPP) retires on $1 million of savings, that’s about $34,000 to $50,000 of annual income. Not that much after working hard to be self-sufficient all those years. But anything more than that will be taxed at that massive 73% so why bother accumulating and investing.

 

Income Sprinkling to Adult Children & Spouses

Income sprinkling to adult children and spouses is on the out in the new tax plan. Basically, if there is justifiable and reasonable contributions to the business, then the sprinkling can continue but, they will likely do more auditing in shareholders aged 21-24 (university tuition years!) and for spouses that may be too “passive” in the company’s affairs.

 

The Final Verdict?

I’m no accountant, but as legal counsel for small businesses our advice is alway strategic. Here’s some things to keep in mind for the next few years:

  1. The impact of these changes, when they’re finalized, will depend totally on the stage of business that you’re in. If you’re in start-up, you’re fine (low income and low income tax bracket, and lots of reinvesting). If you’re in scale-up, then invest and there’s less passive investments – they’re all active! If you’re thinking about retirement soon or if you’re in retirement mode, then what you’ve “stuffed” into your company so far is as good as it gets but try to get as much in there (perhaps take on some debt to do so to get as much grandfathering in as possible?). Read more here.
  2. If there are plans to grow, this may just be the very best time to do that. Talk to your tax specialists about reinvesting that cash rather than have it convert to passive investments.
  3. If you’re income sprinkling, consider chatting to your accountant about taking income out as T4 rather than T5?

 

We don’t know where government policy will land, but changes are inevitable in January or 4 January’s from now so have the right advisors on your team, and think strategically about where your business is going. Hang on for the ride! We’re right there with ya!

 

 

Elizabeth speaking about the recently proposed law changes at an Allan Financial event. 

 

Elizabeth Mah

Lawyer-Founder, Paperclip Law