Home Featured Financial Planning Proposed Tax Act Changes: What we know so far

Proposed Tax Act Changes: What we know so far


The Canadian Federation of Independent Business (CFIB) has been exclusively devoted to the needs of small and medium sized enterprises (SMEs) since 1971. The organization got its start when John Bulloch read a white paper proposing a 50 per cent tax hike for Canadian small businesses. Bulloch was infuriated. He wrote a stern letter to the finance minister and took out ad space to have it published. Support poured in from around the nation.

Thanks to one man that stood up for SMEs, and the support he rallied, the proposed tax changes were withdrawn, and the CFIB was born.

CFIB fights on behalf of SMEs for better taxes, laws and regulations. The organization provides resources for business management and savings for members on essentials, such as marketing, banking and freight.

Now, CFIB finds itself on very familiar ground. When proposed sweeping tax reform was announced during the summer of 2017, it included changes that would have a drastic, negative effect on small businesses.

“When the changes were proposed, CFIB read through them and pushed back to make sure the interests of small businesses were protected,” says CFIB’s Amber Ruddy, director of provincial affairs, Alberta. “The federal government has made adjustments to temper their proposals, but entrepreneurs are still troubled about the negative effects the revised proposals will have on small and medium-sized firms. There is still significant red tape being added that will make things more complicated for small business owners.”

One of the challenges many SMEs took issue with was the implication that private business owners were gaming the tax system and using loopholes to create enormous profits while evading taxes. That notion, as any entrepreneur can readily prove, is very far from the truth. Most SMEs are not the burgeoning empires with offshore accounts and lavish family trust funds that the government is hinting at.

According to Key Small Business Statistics (June 2016), there are 169,305 private businesses in Alberta, of which 165,792 employ less than 100 people. Just 437 employ more than 500 people. SMEs are largely your non-chain restaurants, boutique retailers, fabrication and machining shops – they are run by your friends, your neighbours and people just like you. In the eyes of the government, however, SMEs appear to have Trump-like power and resources.

“The government’s tone was not effective,” Ruddy agrees. “Treating small business owners like tax cheats is not the way to put through the biggest tax reform we’ve seen in decades. It is clear that the federal government is trying to raise revenue. Their definition of fighting for the middle class is forgetting that small business owners make up the middle class. Removing rewards for being a business owner is not inspiring people to create jobs. CFIB wants to create a positive climate for the next generation of business owners, and treating entrepreneurs like employees doesn’t inspire business confidence.”

She notes that opening a private business is incredibly risky, and there should be rewards, and incentives, for those who are creating jobs and opportunities for other Canadians. The government has now reinstated its promise to move small business taxes down to 9 per cent, but there are still measures in the tax package that business owners are not excited about.

CFIB isn’t giving up. There is an “Act Now” button on their website (www.cfib-fcei.ca) for business owners who are looking to join the fight. “We are going to keep going until small business owners are heard,” notes Ruddy.

Greg Gartner, director of Canadian Tax Law in Moodys Gartner’s Edmonton office, also explains how the proposals on small business taxation are a definite attack on private businesses (small businesses), rather than public corporations (large businesses).

Concerning the passive investments issue of the proposed tax plan, Gartner explains, “The tax on passive assets is the biggest differentiation between private and public corporations. The new taxation regime attempts to penalize current investment income earned on assets, which were formerly subject to tax at the small business rate. As public corporations do not have this ‘small business deduction,’ they will not be affected.”

When it comes to implementing changes that would make this tax plan more feasible, Gartner believes that the proposals that have been withdrawn by the Liberal Government were actually based in sound tax policy. “The proposals that attacked the conversion of dividend income to capital gains had a sound policy basis in preserving integration (that a dollar of income earned through a corporation would be taxed the same as a dollar of income earned personally),” says Gartner, “However, the legislation was so poorly drafted and over-reaching (putting uncertainty into many ordinary, commercial transactions) that the Liberals were forced to withdraw it.”

Moving forward, Gartner says, “Our firm has been advocates that these proposals should be withdrawn in their entirety, and that consultations take place nationally to simplify the tax system for small business.” He believes that simply trying to patch these proposals is not enough, and a rewrite is needed.

Gartner goes a step further, suggesting, “We can expect legislation on the passive income proposals to be introduced in the next Federal Budget in March 2018. Every business person should be involved and lobby on behalf of a reversal of these proposals. They will be complicated and pervasive, and will directly affect Canada’s competitiveness in attracting entrepreneurial capital.”

Deborah MacPherson, CPA, CA, CFP, a partner and a tax business unit leader at KPMG, provides an accountanting perspective. “The government has already scrapped two entire sections of their original proposal, due to the feedback that they have received from Canadians,” she notes. “For the other two sections: one, they are promising more guidance; the other, they are providing relief without a lot of details at this point.”

Within the government’s original tax proposals, there were four major topics of change, which included: income splitting, lifetime capital gains exemption, “anti-surplus stripping” rules, and passive investments held in a corporation. The two sections that have since been scrapped surround the lifetime capital gains exemption and “anti-surplus stripping” rules. However, the provisions surrounding income splitting are still a part of the new tax proposals.

As it stands now, the provisions regarding passive investments held in a corporation are still going forward, and are included in the revised versions of the proposal. The federal government has suggested some relief in the form of grandfathering existing investments held inside a corporation, as well as a safe harbour threshold for new investments before the new rules would apply. The government has promised more details surrounding this topic in the next federal budget.

“Even with the changes, these proposals are extremely far-reaching and will have a significant impact on the economy,” says MacPherson. “They’re proposing a total overhaul on how private companies are taxed.”

The issues surrounding passive investments held in a corporation are especially concerning, as this topic does not seem to be receiving the attention that it deserves, considering the impact that the new proposals will have on small businesses. “Rather than saying something like, ‘This is really complicated. What we’re proposing represents a major change to our tax system. Let’s pull it back and take the time to study this properly,’” MacPherson says, “they are trying to push these tax proposals through quickly without considering the all-round impact.”

She also notes that companies throughout Edmonton should begin doing what they can now, to prepare for the changes that this tax proposal may bring. “Make an appointment with a tax advisor,” says MacPherson, “To get snippets of information is not going to be helpful. Sit with someone who understands the new rules, methodically go through the proposed changes against your situation, and see where you’ll be impacted.”