Proposed tax changes target small businesses

Published August 28, 2017

If you’re a small business operator who created a private corporation, potential tax changes could impact you. This proposal by the federal Finance Minister, introduced in July, overhauls the taxation of private companies.

The proposal aims to make sure that high-income earners don’t incorporate to reduce their personal income taxes, but the changes could have consequences for restaurant entrepreneurs and their family members.

Proposed taxation changes affect the following:

  1. Income sprinkling: Changes would prevent owners from reducing their taxes by “sprinkling” income among family members (shareholders) in lower tax brackets. This change doesn’t recognize the shared risk of family members who are all vulnerable – in terms of their assets, usually their home and a means of support – if the venture fails.
  1. Passive investment income: Changes prevent corporations from retaining earnings as investments within the business – such as in savings accounts, GICs or stock portfolios – instead of investing the earnings to grow the business. This change doesn’t recognize the fluid economic and business cycles that restaurants operate in. It doesn’t account for the fact that restaurants need to have investments as insurance against unforeseen costs or save for major investments to the business.
  1. Capital gains: Changes limit lifetime capital gains exemption to only one shareholder in the family. This would impact the ability of restaurant operators to sell or transfer their business to a family member, as well as their planned retirement income.

 Learn more about the proposed changes.  

 

What does this mean for you?

If you’re a public company or a shareholder of one, these changes don’t affect you. However, if you’re Canadian-controlled private corporation with family members helping you grow your business, you and your family members could be impacted.

 

What should you do?

If you’re in this situation, we recommend you consult with your accountant or tax specialist to see how these changes impact you. After that, contact your Member of Parliament with concerns.

For general tax advice on this issue, review KPMG’s information sheet. To speak to an expert, contact KPMG’s Rakan Aown at 1-888-99-ADVSR or 1-888-992-3877.

 

Next steps

The federal government wants responses to this proposed legislation by Oct. 2, which we believe is not enough time to identify its complex and sweeping changes to the tax system. We’ve joined a small business coalition to ask for an extension to the consultation. We’ll work together to point out the unintentional effects on small businesses and future economic growth.

 

We want to hear from you

Restaurants Canada wants to know how these tax changes will affect you. Is it a big issue for you or not at all? Tell us by taking our survey.

Your response will help us put together our submission to the Finance Minister and our pre-budget presentation to the House of Commons Finance Committee in the fall.

 

Got questions? Contact Restaurants Canada’s Member Services Department at 1-800-387-5649.

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