Highlights from the 2017 Federal Budget
The government wants to ensure the fair treatment of Canadians.
The budget announced a consultation to review the fairness of certain business strategies used by private companies and their shareholders...
The focus of the consultation is three-fold:
Dividend sprinkling to family members
Holding passive investments inside a private company
Converting regular income into capital gains which are only taxed 50%
Many left leaning, commentators want to make sure people who have gone to school, studied hard, take business risk and make more than they spend, do not use a corporation to save too much tax and create an abundance of wealth for their families. The government must be seen by these left leaning people as being sensitive to their point of view, so we have this consultation process.
The second consultation question is puzzling. Tax integration has been designed to ensure that investment income earned in a small business is taxed at the highest marginal rate= 50.16% for interest, 38% for dividends and 25.08% for capital gains until it is distributed to the shareholders who pay tax at their marginal rate. They to could be linking the benefit of the small business tax rate to employed more than 3 employees, something that Quebec introduced in 2016. Or perhaps, the UK study on eliminating the small business rate is on their mind, so all corporations pay 26.5%. Either issue results in a tax rate of 26.5%. The personal highest marginal tax rate is 53.53%, so a tax rate of 26.5% is a good benefit.
The third question only applies to limited transactions that very few business owners utilize. If you plan to prepay net tax of 10.08% by transferring goodwill to a company you own or between companies you own, you should probably do it sooner than later. The benefit to prepaying net tax of 10.08% is that future dividends from the company equal to 50% of the gain on the sale of goodwill will be tax free.
A simpler way to achieve the same objectives is the use of a Critical Illness insurance policy with the return of premium component. If you get 1 of 25 critical illnesses your company recieves $1 - $2.5 million dollars tax free, if you don't get sick, 100% of the total premiums are returned to you without further taxation. This can be often used to pay significant amounts of personal debt. We view it as Heads you win, tails you don't use.
In conclustion, the fairness issue could be debated... In the U.S, families can share income between spouses and children can only receive a wage from the business after age 25. While there is concern about dividend sprinkling to all family members in Canada, it is hard to imagine the unfairness claim could be made against divdend sharing between spouses, given our family law. Although, restricting dividend sprinkling to children in university/college could make sense from a fairness point of view. This would cost most entrepreneurial families about $50,000 - $100,000 per child over their lifetime. So, if you are a business owner with 2 children, you will have to retire 6 months to 1 year later.
We will be in contact with our clients to ensure all your planning is in place, help you assess the impact of dividend changes on your situation and suggest proactive steps of improvement. For business owners and professionals who are not yet a client, we offer a complimentary second opinion to help you save tax now and plan for tax increases in the future.