If you’re the owner of a private company in Canada, you should be concerned about the federal government tax changes that were proposed on July 18 (starting a 75 day consultation period). These proposals (if enacted) will take away many of the income splitting tax planning opportunities available to entrepreneurs and their families. One investment advisor we know has modelled out that these changes could reduce his clients’ investable assets in retirement by 40%!
If you’re a business owner who is considering selling your business in a few years, you should be even more concerned! Many of you have established a family trust to own your shares and multiply the use of the lifetime capital gains exemption (LCGE) amongst your family members (assuming you have a business worth more than $830,000).
However, one of the proposed changes is to eliminate these tax savings that use family trusts … meaning, if you sell after 2017 (proposed), you could get 1 LCGE when you sell your business, not multiple … and since each exemption is worth approx. $225,000 in tax savings, some of you are going to pay much more tax that you thought when you sell.
I’ll leave that up to each of you to determine whether that changes your plans as to when you sell your business. There are some options for ensuring that you utilize the maximum LCGE available to you this year, rather than you having to sell this year (before these rules come into force).
Remember our tagline … One day, we will all sell our businesses, either voluntarily or involuntarily. Unfortunately, one of the involuntary reasons to sell could be a changing tax regime.
If you believe (as I do) that business owners should be treated fairly in terms of taxes (but that doesn’t mean equal to that of employees), please contact your own local MP. See below for the text of my message to my own MP.
The tax changes proposed by your minister Morneau in July will have a devastating impact on small business owners.
It is simply not “fairness” to compare the income of an employee to that of a small business owner … the employee doesn’t have fluctuating income, he/she didn’t invest capital to start the business, the employee has benefits like sick days and (often) a pension … the list of differences goes on and on.
And the government spin that this is about closing “loopholes” for the wealthy is simply incorrect. The tax planning being disallowed here is a fundamental part of the planning for small business owners who form a part of the middle class in this country. To be clear, getting rid of dividend “sprinkling” for million dollar business owners will not significantly impact those owners because most of their income is being taxed at the high rate already, but for the small business owner making $100-400,000/year, it will be a huge increase in taxes.
Does your government want mobile professionals (like doctors) leaving the country because you dramatically increased their overall tax rate? Does your government want entrepreneurs to give up starting a business because they’ll pay over half of their income in taxes?