There are 3 proposed changes that could effectively kill the small business as we know it.
1. Income “Sprinkling” - Many small business owners employ and pay family members for working in the business. Although this splitting of income has always been on the radar of CRA, the government now proposes to take it a step further. IF the changes are approved, CRA will be able to apply a ‘reasonableness test’ to determine if in fact, the family member is actually an employee or the business owner is merely attempting to save on taxes by incurring the payroll costs within the business.
This ‘test’ has always been in place for family members under the age of 17 - now they want to expand the test to include all family members under 24. If CRA does a payroll audit, and determines the family member is not a bona fide employee (not being treated the same as another individual holding the same position), the income would attribute back to the business owner and be taxed at a higher rate. The government admits the issue causes an estimated loss of only $250 million per year in taxes. The question is how much will it cost to investigate, enforce and collect this money. CRA will have to hire a many new auditors, the tax courts will be further clogged up.
2. Taxation of “Passive Income” – Some small businesses make investments within their corporation such as stocks and real estate. The income from these investments is then taxed at lower corporate tax rates. The proposal is to eliminate this tax benefit and make the investment income taxable as if earned personally.
3. Lifetime Capital Gains Exemption – Small business owners have been able to claim a capital gains exemption on the sale of the shares of a small business corporation; an amount that has now increased to $835,716. The Liberal government is proposing three changes: 1. Individual shareholders under the age of 18 will not be able to claim the exemption 2. Beneficiaries of Trusts will no longer be able to claim the exemption on the value of the shares that accrue during the period in which the trust holds the shares 3. Individuals that are subject to the ‘Income Sprinkling’ test will not be able to make use of the capital gains exemption.
This Liberal government seems to have forgotten small business is the foundation of the entire economy; we provide millions of jobs, pay a tremendous amount in taxes - income taxes, payroll taxes, consumption taxes, health taxes, etc. Eliminating small business of tax advantages for taking tremendous risk to start a business and employee a number of others will have large negative impact on the economy.