Foreign Tax Taxation

Canadian SMEs Seek Delay To New Tax Rules

The Canadian Federation of Independent Business (CFIB) has called for the implementation of new income sprinkling rules to be delayed.

According to a news report sourced from following a consultation on controversial proposals to reform the tax planning rules, the Government confirmed in October that it would be moving forward with plans to restrict income sprinkling by private corporations.

Specifically, the report disclosed that the new rules would become effective on January 1, 2018, but detailed legislative proposals have yet to be released.

Commenting on the proposed fiscal measures, CFIB President, Dan Kelly, said: “One of the largest tax changes for small business owners in 40 years goes into effect in three weeks and the federal Government has provided zero detail or implementation advice to business owners or tax professionals.

“The new rules to the way small business owners share income with family members may require changes to existing business structures and there will be no time to make any of this happen before year end”, Kelly added.

According to the Government, income sprinkling is a strategy that can be used by high-income owners of Canadian-controlled private corporations (CCPCs) to lower their personal income taxes by sprinkling their income among family members who do not contribute to the business.

The news report stated further that the Government intended to introduce “reasonableness tests” for adult family members aged 18-24, as well as those 25 and older. These adults will be asked to demonstrate their contribution to the business based on the following: labor contributions; capital or equity contributions; the taking on of financial risks of the business; and/or past contributions in respect to previous labor, capital, or risks.

However, CFIB is pushing for the implementation of the changes effective January 1, 2019.

Kelly said: “After positive signs that government was starting to listen to the concerns of small business owners, moving ahead at this stage with changes that have not been legislated, studied, or even shared would amount to another broken promise to Canada’s entrepreneurs.”

CFIB is concerned that the new rules will not take into account many of the formal and informal ways in which families participate in a business. It said that business owners are worried that they could see their red tape burden increase significantly in order to prove that their family members make a “meaningful contribution” to the family enterprise.

The Government maintains that the majority of private corporations will not be affected by the reforms. It calculates that only around three percent of CCPCs benefit annually from income sprinkling, and that about 80 percent of these families earn more than CAD125,000 (USD97,112) in total income, with 50 percent earning more than CAD200,000.


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