What will the impact of tax changes be on business?
A dozen factors influencing taxation in the coming years.
In the federal election, Justin Trudeau ran on a program of increased infrastructure spending to be paid for by borrowing money. That turned out to be both popular with the electorate and also feasible. Most of us acknowledge that there is a desperate need in the country for infrastructure improvement. Happily, borrowing is not difficult since Canada’s federal debt is fairly low.
Trudeau also put forward a program designed to tax higher income earners and reduce the tax on middle-income families. Trudeau claimed that these proposals were not aimed at increasing tax revenues. He maintained that the tax changes would be revenue neutral. That is a reminder that the Tax Act is not just used by the government to obtain money. It is also used as a tool for social engineering. In this case, the Liberal’s goal is to redistribute wealth in the country.
That sounds good, as all politicians’ promises are meant to, but the result of the proposed tax changes will mean that many small business owners will feel a harsher tax bite beginning in 2016. The Liberals came into power in October 2015 and they moved very fast. They brought down a mini-budget just two months later in December. Another budget was presented in the spring. When the impact of the tax changes become widely understood, many people who voted Liberal may regret that decision. But it is important to recognize that the movement to tax higher income earners had already started under the Harper government. The Conservative perspective did differ in one important way. Harper’s goal was not social engineering. They simply recognized that the federal government needed money, mostly to offset the loss of revenue from the oil patch.
The major Liberal changes look like this:
1. There will be a new high tax rate on taxpayers earning over $220,000. In Ontario the increase in the maximum rate will be four per cent to 53.5 per cent. In BC the maximum will increase to 47.7 per cent and in Alberta it will increase to 48 per cent. At one time $220,000 might have been a lot of money, but with the recent decline in the dollar it is worth $158,000 USD.
2. Tax on dividends has been increasing under the Tory government. Under the Liberals the tax on dividends will be even higher. The tax on eligible dividends (basically dividends paid by public companies) will be 39 per cent in Ontario. The same tax is much lower out west – it is about 31 per cent in both BC and Alberta.
3. The tax on non-eligible dividends is much higher. Non-eligible dividends are dividends paid to you by a private company out of active business earnings. Those dividends will be taxed at 45 per cent in Ontario and about 40 per cent in BC and Alberta. Not long ago these dividends were taxed at 33 per cent.
4. There will be a reduction in the TFSA limit. The annual limit will be rolled back to $5,500 from its current $10,000. Unused annual amounts will continue to roll forward.
5. After a very brief existence, the family tax cut will be ended. The tax cut allowed for an income splitting benefit with a low-income spouse. The benefit was designed to help families with one high-income earner and a child under 18.
6. Families with income above $200,000 will no longer be eligible for the Child Tax Credit.
“When the impact of the tax changes become widely understood, many people who voted Liberal may regret that decision.”
Some things for the future
7. There had been talk of increasing the age of eligibility for OAS. The Liberals have stated they will maintain the benefit at age 65.
8. The Liberals have suggested that they will consider increasing CPP maximums in the future, which will lead to higher federal payroll taxes. This may mean that Ontario will drop its plans for an Ontario pension plan.
9. The Liberals have stated that they are philosophically opposed to the low small business rate being used by high-income earners rather than supporting small business. Quebec recently eliminated the small business rate on small corporations that did not have more than three full time employees. There is a possibility that the federal government will come out with similar provisions in its March 2016 budget. The Quebec government has said its move will mean 75,000 companies in the construction and services sector will no longer qualify for the small-business tax rate.
Two amendments left over from Harper that will reduce small business taxes
10. Under then Prime Minister Harper’s June 2015 budget, the small business tax rate will drop two per cent in stages from 2016 to 2019.
11. CCA Class 53 was introduced in June 2015. This new class will allow the rapid 50 per cent depreciation of equipment used for the manufacture or processing of goods in Canada.
And finally…a very scary change
12. You may be aware that an intercorporate dividend paid by a subsidiary to a parent is tax-free. In fact, the recipient company does not need to be a parent – it can simply be connected to the payor company. Two companies are connected if one owns more than 10 per cent of the shares of the other. That is a really useful provision since it allows funds to be shifted between members of a corporate group. Also it allows dividends to be paid from an opco subsidiary to a holdco parent, which is a primary means of creditor-proofing an active business.
The Conservative government proposed major changes to section 55 of the Act in its April 20, 2015 budget. The new section 55 would do away with many of benefits of easy tax-free intercorporate dividends. The changes were made in response to a specific court decision that the Canada Revenue Agency lost. The court case dealt with a transaction by which a company was able to convert a taxable capital gain into a tax exempt dividend. Without going into the complicated details, the Department of Finance’s solution to what they perceive as an abusive transaction is remarkable for the imposition of costs that it will load onto the small business sector.
Professional tax groups have made the Ministry of Finance aware of the many difficulties this poorly devised proposal would create. The Conservatives did not respond to these expressions of concern, but the proposal has not been put into a Bill as yet. The problem is that the budget proposed that the new rules cover all dividends declared after April 20, 2015. That was nearly a year ago, and many companies could be trapped by the new rules if they are passed now with retroactive dating. Hopefully, the next Liberal budget will make major changes to this proposal.
Hank Bulmash, CPA, CA, MBA, TEP, is CEO of Bulmash Accounting Professional Corporation in Toronto, ON. He can be reached at firstname.lastname@example.org.
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May 11, 2022