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How proposed tax changes may affect small business

In this month's column, Will Mactaggart, of Richardson GMP Ltd., talks about possible changes to tax rules for business owners
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Current tax laws allow business owners some latitude when it comes to income distribution and exemptions. Proposed changes will tighten the rules. 

Perhaps the most discussed change is a proposal to close the loophole on “income sprinkling”. This practice allows business owners to distribute income to individuals — often family members or investors — who may not play an active role in the day-to-day operation of generating income for the business. The changes will limit these practices with an intent to level the playing field for all taxpayers. The change may not be absolute: under current discussions, the Ministry of Finance is planning a reasonableness test to limit the dividends being paid to a family shareholder where there is no capital contributed or work performed.

The government is also looking to adjust the “kiddie tax” rules which results in top rate income tax being payable on dividends paid to minor children. The proposed changes will to apply to individuals until age 24, as well as continuing to apply kiddie tax on second generation income.

Capital gains exemptions are the other critical area of discussion in the changes. These are profits earned by owners from the sale of shares in a business. Converting income to capital gains by selling shares to a holding company can help business owners take advantage of lower tax rates. This is a common way for them to save for retirement or business expansion. On this, the government adjusted their initial stance. To accommodate these strategies, proposed relief measures for passive income in private companies would see the first $50,000 of passive investment income not subject to a new tax, where conditions are met. 

The details of this legislation to be announced as part of the 2018 fiscal budget this spring.

Will Mactaggart headshot

Will Mactaggart, Director, Wealth Management and Portfolio Manager at Richardson GMP.

Reach him at:, or 519-827-2906

All material has been prepared by Will Mactaggart. Will is a Director, Wealth Management and Portfolio Manager at Richardson GMP Limited. The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.   

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