The Federal Government is proposing tax changes that could affect small businesses, including independent and family-run hotels.
The proposed rules could raise taxes, increase the administrative burden on SMEs and heighten the impact on family-run businesses.
A consultation is currently underway, focusing on how “tax-planning strategies involving corporations are being used to gain unfair tax advantages.” The document contains proposed policies to close these “loopholes.”
There are four key changes that will affect business:
- Sprinkling income using private corporations. The government wants to tighten rules to prevent a business owner from unfairly transferring income to family members who are subject to lower personal tax rates. In certain circumstances, owners would have to demonstrate that wages and dividend payments are “reasonable.”
- Multiplying the Capital Gains Exemption. When an individual sells a small business, the first $850,000 of capital gain is exempt from taxes. The government wants to prevent tax planning structures that enable multiple family members to use their exemptions.
- Reducing the tax deferral advantage on portfolio investment inside a corporation. Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates (which are generally much lower than personal tax rates). The owner defers paying personal income or dividend taxes until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
- Converting a private corporation’s regular income into capital gains. Income is normally paid out of a private corporation in the form of salary or dividends that are taxed at the owner’s personal income tax rate. In contrast, when a business is sold, it is taxed as a capital gain, where only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains. The government wants to tighten the rules to prevent certain tax planning structures, but it is open to more favourable treatment for genuine family business transfers.
The AHLA and the Hotel Association of Canada want to know how these proposed changes could affect you.