Here's how the New Liberal Tax Changes will affect your Small Business

Updated October 2017

In mid-July, the liberal government announced a three pronged plan to increase "fairness" between small business owners and salaried employees. The tax reform is aimed at incorporated small business "loopholes", with the intention to increase the tax load on the rich while supporting the middle class. 

The Overview

1. Restrict income sprinkling between family members
2. Increase taxation on “passive” investments within the business
3. Restrict the ability for businesses to convert dividends into capital gains

The Criticisms

• Implementation
  • The plan is very complex in nature, and lacks specific solutions
  • In most instances, a test of “reasonableness” will be required
  • It will also be costly to implement, given that each individual business is a unique case and must be assessed on income sprinkling and estate taxes by “reasonableness”
• A lack of information available to the public
  • There is a high amount of misinformation out in the public
• A broad range of small business types will be affected
  • Although initially aimed at the rich, the plan now affects a greater number of middle class business owners instead
• The fundamental differences between small business owners and salaried employees
  • These two “classes” share different benefits and provisions, and as a result, should not be equated through strictly monetary means
• It falls back on the Liberal campaign promise
  • A majority of incorporated small business owners fall into middle class

The Side Effects

• Making it harder to share income with family who actively participate in the business
• Limiting a small business owner’s ability to invest and reduce financial risk
• Major problems associated with passing down a family business in the future
• Reduced incentive for entrepreneurs to incorporate or create businesses in Canada

Finance Minister Bill Morneau claims that they will consider unintended effects into their plan after the consultation period, and will make changes accordingly.

If you found this helpful, take a look at 5 Events Impacting Canadian Small Business Owners in 2018.

With the federal government cracking down on tax exemptions for small business owners, it's now a better time than ever to invest in a Health Spending Account (HSA). At Olympia, we provide cost-effective HSA's specifically for incorporated businesses like you. In a nutshell, they turn your after-tax personal expenses into before-tax business expenses.

Read our FREE beginner's guide to learn more: 

To read more on both sides of the issue:

https://beta.theglobeandmail.com/globe-investor/personal-finance/taxes/proposed-tax-changes-will-shake-the-small-business-world/article35754872/?ref=http://www.theglobeandmail.com&

http://www.cbc.ca/radio/thecurrent/the-current-for-september-7-2017-1.4277291/how-proposed-changes-to-canada-s-tax-system-could-hit-small-business-1.4277391

http://www.cfib-fcei.ca/english/article/9533-federal-tax-changes-add-new-threats-for-independent-business.html#

http://www.cbc.ca/news/politics/trudeau-bahamas-vacation-rcmp-1.4286033

http://nationalpost.com/opinion/conrad-black-the-liberal-tax-reform-proposals-will-be-a-national-disaster#comments-area

http://www.cbc.ca/news/canada/calgary/small-business-tax-changes-unfair-1.4269614

http://globalnews.ca/news/3708183/small-business-liberal-tax-changes/