Proposed tax changes would shake the small-business world

Background Information:

To make sure that all readers have a basic understanding of what the Finance Minister is proposing, here is a summary and a web reference with more details:

First, they propose that Tax Sprinkling (Income Splitting) should be disallowed. For example, if you compensate any member of your family, especially your adult children between the age of 18–24, and CRA decides, that under the “reasonableness test”, they are being overpaid for their role, CRA will assess them personal taxes at the maximum personal tax rate. They will, also, charge taxes at the maximum personal rate for all income earned from the invested funds that were received from the corporation – income on income.

They also propose to minimize the eligibility of the family members participating in the lifetime capital gains exemption upon selling the family business. This exemption is worth $835,716 per family member who is a share holder, however, if some of the gains in the value of the business occurred while the children share holders were minors that portion would be disallowed to the children share holders.

The government is exploring how to encourage surplus funds that are invested passively to be distributed and not saved. Despite the fact that passive income is heavily taxed already, the government is looking how to tax it at an even higher rate.

Finally, they want to prevent the conversion of income into capital gains which would reduce the taxes could be assessed when selling the company. My understanding was that the original legislation was supposed to eliminate this loophole, and these steps are to ensure that this gap is closed, which makes sense to many experts.

For more details, please refer to

Dear (Your Member of Parliament):

Your Member of Parliament:

I am very concerned with the many negative consequences of the proposed tax changes by Finance Minister Bill Morneau.

As a country, we wonder why our productivity lags behind that of the United States. We also wonder why businesses that may support their owners in a prosperous life style are not encouraged to continue to grow in order to benefit the entire economy. Based on extensive research to-date, it is clear that there is little or no incentive for the average small business owner in Canada to take on risk to grow their business. This is due to high personal tax rates, even for relatively low income levels, and now proposed higher corporate tax rates for small businesses.

Indeed, if we want to continue to lag behind the productivity and private-company growth rates of other countries, then continue to tax us more. This will also further encourage businesses to grow the underground economy since this may be the only way to put funds into their pockets.

Below is an email sent by an Oakville resident to his Member of Parliament. I fully support his views and feel that this government is going in the wrong direction by trying to get more blood from the already overtaxed Canadian taxpayer. This is not the way to grow the economy.

"Mr. Oliver, I am an Oakville resident and voted for you in the last election.

I am a business consultant who incorporated my company 12 years ago when I started my consultancy having left corporate life. I typically bill in the low six figures per year and employ my wife who assists me in the business. I take a small salary, as does my wife, and leave the balance in the corporation as retained income, which I invest in order to provide me ongoing income once I no longer operate the business. I am 67 years old so this will not be far in the future. I am registered for HST and collect in the low 5 figures annually which benefits the government.

I strongly oppose the tax changes proposed by Bill Morneau. These changes, if they come to effect, will reduce my corporate income and therefore my retirement savings for future years. I am not able to sell the company to capture the small business capital gains deduction as the company has no value without me.

I currently add to the GDP of this fine country and am currently not a burden to the government or society and want to keep it that way. I do not think that you can compare a salaried employee making the same annual income as I do with an incorporated consultant who works both to perform the promised services to his clients as well as to work on an ongoing basis to develop new clients, manage the paperwork, pay a tax preparer etc.etc.. I am reasonably successful but have taken a large risk to do so. The tax incentives to being incorporated must be maintained.

I ask that you pass on my strong objections to your finance minister and ask that you forward this email to the Finance Department with a cc to me. Should these changes pass, my wife and I will not be voting for the Liberal party in any future election."

We are suggesting you send your comments to your MP, , the Small Business Minister and Finance Department.