Proposed tax changes may hurt small business owners

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Alaina Spec, LMR Lawyers

The current federal government made election promises which could increase the amount of tax small business owners and their families’ pay, and these changes may become a reality with the upcoming 2016 budget.

“Small business corporations should be very concerned with any changes affecting their tax status,” says Alaina Spec, a partner at Low Murchison Radnoff LLP, who practices in the areas of estate and corporate law, with a focus on tax issues.

In its election platform, the government stated it “will ensure that Canadian Controlled Private Corporation, or CCPC, status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.” 

Most small business corporations in Canada are Canadian Controlled Private Corporations (CCPC). CCPC status means that the corporation is entitled to claim the small business deduction, resulting in a reduction of the tax that would otherwise be due. In addition, small businesses often structure their corporations to include family member shareholders, allowing them to share income and reduce the amount of tax paid. 

The government has not provided clarification on its statement. But in advance of the pending 2016 budget, possible changes to CCPC status are weighing heavily on the minds of small business owners, Spec says.

“Many of our clients have set up corporations specifically to comply with the existing tax rules, and any changes to those rules will significantly affect how these businesses operate.”

What could change

While the election promise was vague, industry specialists are speculating on what changes may be made. 

The government may consider limiting the small business deduction to private corporations that employ a minimum number of employees, said Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services, while speaking recently to the Ottawa Estate Planning Council.

This rule has already been implemented provincially in Quebec, where, starting in 2017, certain types of corporations must employ three or more employees to qualify for the Quebec small business deduction.

This change will have significant implications for small business corporations, particularly those working in the technology sector, as well as for professional corporations, as the founder, along with their spouse/partner or children, would often be the only employees of the corporation, Spec says.

Another possibility suggested by Golombek was that the government may impose tax at the highest marginal rate on dividends paid to family member shareholders such as a founder’s spouse/partner or adult children. This would effectively remove the incentive to income split.

Founders often add their spouse and children as shareholders, with the goal of paying them dividends over time. For example, helping an adult child pay for college or university.

What impact it will have

“Eliminating the tax benefits for these individuals means existing corporate structures and this type of tax planning would be essentially useless,” Spec says. “Without these tax benefits, many will simply not incorporate, choosing instead to run their business through an inappropriate business structure, if at all.”

Effectively, the implementation of either or both of these changes would result in a marked decrease in the use of corporations, particularly for high-income individuals. Many groups have been strongly advocating against these types of tax changes, suggesting that targeting these tax driven uses of corporations does not produce an even or fair tax treatment or result.

“Being a small business owner is a challenge – but there have always been some tax benefits for those willing to take on the risks of owning their own business,” Spec says. “These proposed changes will eliminate those benefits and need to be very carefully considered.”

For more information contact Alaina Spec at aspec@lmrlawyers.com or 613-696-1312.

Organizations: Canadian Controlled Private Corporations, Low Murchison Radnoff, CIBC Wealth Advisory Services Ottawa Estate Planning Council

Geographic location: Canada, Quebec

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