Canadian small businesses have been hit with numerous changes (or proposed changes) this year that will threaten their long-term prosperity and their ability to compete globally. From minimum wage hikes to the proposed tax reforms titled the “Fair Tax Plan”, life as a small business owner isn’t getting any easier.
For those who haven’t heard much about the “Fair Tax Plan” and for those struggling to make sense of the proposed changes under the plan, here’s a quick breakdown. All measures are aimed at modifying areas where business owners are allowed to allocate income in a different way to reduce their marginal tax rate. If any of the following tax situations apply to you, then you will be impacted by these changes.
1. Dividends to family members.
You will no longer be allowed to pay adult family members dividends who are over 18 and that are not active in the business. If they are active they will be subject to a “reasonableness test” that is similar to how wages are paid to children and spouses that are not active in the business. This reasonableness test is not yet fully understood.
2. Income from investments retained in your company over the years.
You will be subject to an increase tax rate of up to 73%.
3. Saving for future purchases or expansion.
4. Saving for retirement in your company, including the purchase of real estate.
Quite often business owners plan much of their retirement with assets in their business built over time. These protections for current and future investments will be affected.
5. Selling your business to family.
The tax rate would be higher by selling to a family member than an outsider.
6. You die with assets that have appreciated in value in the company
Value of shares in your company would be subject to taxation.
7. You have, or plan to implement estate planning strategies
The issue with levelling the tax rates between owners and employees are that both areas have very different risks involved. Employees enjoy the convenience of consistent income, while a business owner’s income typically fluctuates. For many self-employed, their income is often used to budget the business while an employee assumes no risk.
“This isn’t just about dollars and cents. It’s about the survival of tens of thousands of small businesses and family farms across Canada,” said the Hon. Perrin Beatty, President and CEO of the Canadian Chamber. “We appreciated hearing from the Minister of Finance but we remain convinced that his proposed tax changes pose a clear threat to small businesses and that the government’s consultation process is totally inadequate”.
After all, 2.7 million Canadians are self-employed, and collectively they employ 48.3% of the Canadian workforce. Let’s not bite the hand that feeds.