08 Mar Small Business Tax Planning Changes – One Year In
A 2016 wide-ranging review resulted in a new plan in 2017 by the government to create greater tax fairness by eliminating or changing some corporate tax planning strategies. Some of these changes were implemented and received mixed reviews from small businesses and individuals.
Small businesses already feeling the pinch were affected in 3 key areas:
Income sprinkling – which can result in reduced income taxes by reducing the income of otherwise high-earning individuals by sharing that income with family members who are subject to lower personal tax rates.
Passive Income – Earnings accumulation that can be invested in a passive portfolio, such as real estate.
Capital Gains – Earnings taking the form of capital gains (of which only 50% are taxable) instead of taxable income at a higher tax rate.
Changes in these areas have meant businesses need to employ new tax-saving strategies in order to prevent tax increases which can have a drastic effect on their bottom line.
How Corporate Tax Planning Changed in 2018
From a lawyer’s point of view we saw changes in key areas as businesses pivot their tax planning strategies.
Capital Gains Strips
Under the current system, business owners can compensate themselves through earnings, dividends, or by converting compensation to capital gains. Capital gains are subject to a much lower rate of taxation, enabling the individual to pay less tax.
While the Ministry of Finance did not follow through this year on the threat to remove the ability to perform capital gains strips from corporations, we saw a large increase in these transactions. Businesses are planning ahead for a future where they cannot employ this tactic to reduce their taxes.
The Ministry of Finance eliminated or hampered income-splitting opportunities for businesses. This means that employing family members as a means to reduce individual income is no longer a useful tax planning measure to reduce taxes.
However, we are seeing an increase in the use of family trusts as they are still effective planning tools for reducing individual income and lowering tax rates.
Changes to corporate passive income collecting are designed to reduce the likelihood of business owners realizing tax savings by holding funds within the company instead of taking them as dividends or income. Some business owners object to this change, as it negatively affects their ability to save for future refurbishments or investments.
While this tax planning measure is still in use, professional corporations must take care to avoid a passive income in excess of $50,000 per year to avoid the clawback of the small business deduction.
Corporate Tax Planning and Management in 2019
The silver lining for businesses is that the corporate tax rate is reduced from 10% to 9% in 2019. However, the recent changes in business taxation, combined with poor communication of the changes can result in businesses ‘holding the bag’ at tax time.
To better understand how you can mitigate your risks and make use of the new tax planning measures, contact Stewart Esten’s business tax professionals.