Proposed changes to tax system could destroy small business!


The Federal Minister of Finance has proposed some significant changes to the Income Tax Act, that could have a dramatic and catastrophic affect on Small Business.

There are 3 proposed changes that could effectively kill the small business as we know it.

1. Income “Sprinkling” - Many small business owners employ and pay family members for working in the business; this has been done since the dawn of time. Although this splitting of income has always been on the radar of CRA, the government now proposes to take it a step further.

IF the changes are approved, CRA will be able to apply a ‘reasonableness test’ to determine if in fact, the family member is actually an employee or the business owner is merely attempting to save on taxes by incurring the payroll costs within the business.

This ‘test’ has always been in place for family members under the age of 17, however, now they want to expand the test to include all family members under 24.

So, if CRA does a payroll audit, and determines that the family member is not a bona fide employee (not being treated the same as any other individual holding the same position would be), the income would attribute back to the business owner and be taxed at a higher rate.

The government admits that the “Income Sprinkling” issue causes an estimated loss of only $250 million per year in taxes; the question posed by opposing parties is “how much will it cost to investigate, enforce and collect this paltry amount?” CRA will have to hire a tremendous number of new auditors, the tax courts will be further jammed, and for what?

2. Taxation of “Passive Income” – Currently, some small businesses will make investments within their corporation such as stocks and real estate. The income from these investments is then taxed at lower corporate tax rates. The proposal, although not fully defined, is to eliminate this tax benefit and make the investment income taxable as if earned personally.

3. Lifetime Capital Gains Exemption – Since 1988, small business owners have been able to claim a capital gains exemption on the sale of the shares of a small business corporation; an amount that has now increased to $835,716. Now, the government seems to be concerned about the loss of taxes that this system creates and they propose 3 changes:

a. Individual shareholders under the age of 18 will not be able to claim the exemption

b. Beneficiaries of Trusts will not longer be able to claim the exemption on the value of the shares that accrue during the period in which the trust holds the shares

c. Individuals that are subject to the ‘Income Sprinkling’ test with respect to shares, will not be able to make use of the capital gains exemption.

It is time for the government to realize that small business is the foundation of the entire economy; we provide millions of jobs, pay a tremendous amount in taxes already, with income taxes, payroll taxes, consumption taxes, health taxes, fees, duties and more. Further stripping small business of tax advantages will have such a negative impact on the economy it will become insurmountable.

The position of the Minister of Finance is that small business is tremendously wealthy, we all do everything we can to avoid paying taxes and use our business to merely hide and shelter income. He even uses the words ‘tax avoidance’ and ‘fancy accounting schemes’ to justify these proposed changes.

Perhaps it is time for the government to stop spending like drunken sailors and give small business a break!

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