If you’re a business owner, then you’ve been put on notice that the federal government is coming for you. The Finance Minister’s July 2017 proposal for tax reform takes direct aim at those who operate their business through an incorporated entity and proposes some widespread changes, the likes of which we have not seen in more than four decades. While touted as targeting the wealthiest 1 percenters, these changes have the potential to impact virtually every small business in Canada.
Some of the long-standing tax (“loopholes”) planning strategies targeted include:
- Income splitting through dividends to family members
- Income deferral by investing after-tax income passively within a corporation
- Conversion of dividends into capital gains
If the proposed changes are enacted as currently drafted then we can expect to see higher taxation across a family unit earning income from a business, combined corporate and personal tax rates on passive income of approximately 70%, and the elimination of a common estate planning technique which introduces a significant risk of double taxation upon the death of a shareholder.
Potential Solutions
Fortunately, even in the face of considerable increases to the taxes levied against private corporations, business owners are not without defence. Depending on the final outcome of these proposed changes the following are a few potential solutions worth considering:
- Maximize the use of Individual Pension Plans (IPPs) as a vehicle to accumulate retirement assets on a tax-deferred basis. An IPP is similar to an RRSP, but with much higher contribution limits that are tax deductible to the company.
- Utilize a Retirement Compensation Arrangement (RCA) to defer highly taxed employment income until retirement and create immediate tax savings for the company.
- Focus on asset allocation of corporate investments to reduce passive investment income with particular emphasis on holding assets that produce capital gains, return of capital or eligible dividends in lieu of interest income.
- Consider corporate-owned life insurance for the tax-deferred accumulation of surplus assets for retirement or tax-efficient transfer to the next generation.
Not surprisingly, there has been widespread opposition from taxpayers on these proposals. While the final version of these proposals is still a work in progress, we believe that we will see meaningful tax changes. The best course of action over the coming months is to be proactive by contacting your tax professional to seek their input in the context of your situation. Rest assured that we will also be working proactively with other professional advisors to provide suitable solutions to help mitigate the potential impact of these changes. In the meantime, if you have any questions then please feel free to call.