SNiPS – Canadian Federal Government Proposed Income Tax Changes Impacting Small Corporations

On October 16, the Department of Finance made three announcements:

  1. The federal small business tax rate (currently at 11 per cent) is to be reduced to 9 per cent effective January 1, 2019. It will drop to 10 per cent on January 1, 2018. This tax rate applies to the first $500,000 of active business income each year for a company (to be shared among associated corporations).

 

  1. With respect to the proposed tax on split income (TOSI), the government announced that it would be making changes to the proposals in order to simply them. Although it did not release amended legislation, it did provide some examples as to how it would apply the rules. So, while not backing down from this proposal, the government stated that it will ensure the rules will not impact businesses to the extent that there are “clear and meaningful contributions” by the family members to the business.

Reasonableness tests will be introduced as part of the revised legislation, and family members will need to have made contributions to the business through any combination of the following:

a. Labour contributions
b. Capital or equity contributions (i.e. actual financial contribution)
c. Taking on of financial risks of the business (i.e. co-signing a loan or other debt), and/or
d. Past contributions of the above.

The take-away from this announcement is that the government is going to try to reduce the compliance burden in trying to establish how a family member could make a contribution.

New revised legislation is to be released next fall (which means that technically they could have until December 2018). The
changes are still to take effect January 1, 2018.

As always, if you have any questions or would like to discuss, please don’t hesitate to let me know.