Finally, with a month to go before the election, the Conservative Party is showing some of their tax policy plans.
First and foremost among their proposals:
Appoint an expert panel to undertake a comprehensive, system-wide review of taxation in Canada and suggest ways to modernize it, simplify it, and make it fairer
Having started practice shortly after the 1972 Tax Reform, I can definitively say that this is long overdue. For years Liberal and Conservative governments have made tax changes in a piecemeal fashion, with little or no overall policy.
The changes introduced by Morneau in 2017 galvanized the tax community in a manner that I have never seen, with the whole community calling for comprehensive review and reform of the system.
In December, 2017, the Standing Senate Committee on National Finance tabled its report on the tax proposals. Their three recommendations were:
First, they recommended that the proposals introduced last July be withdrawn.
Secondly, they recommended an independent comprehensive review of Canada’s tax system with the goal of reducing complexity, ensuring economic competitiveness, and enhancing overall fairness.
Thirdly, they recommended that if the proposals were to be proceeded with, the implementation should be delayed until January 1, 2019 at the earliest, and that, among other things, an economic impact assessment be undertaken.
The Conservatives are promising to implement the first two, in which case the third is likely not necessary.
The other Conservative proposals are:
Repeal Justin Trudeau’s tax increases on small business investments so hard-working owners aren’t punished for saving for a rainy day or their retirements
It isn’t entirely clear what this means. However, the Liberals increased taxes paid by Canadian controlled private corporations (CCPCs) on their investment income, partly by increasing the tax that a corporation pays on its business income, if it also has investment income.
Aside from telling outright lies as to what they were going to do, the following is the effect.
For CCPC’s that have both investment income and business income, whether in one company or in associated companies, the tax on their active business income could increase by up to $65,000 annually.
Under the rules introduced by Morneau, if a CCPC and its associated corporations earn more than $50,000 of passive investment income in a given year, the amount of income eligible for the small business deduction would be gradually reduced, disappearing when the CCPC earns more than $150,000 of investment income.
The Small Business Deduction (SBD) is a tax credit that reduces the corporate income tax rate applying to the first $500,000 per year of qualifying active business income of a CCPC. The reduction in the tax rate is approximately 12.5%. In Ontario, getting the Small Business Deduction and paying the low rate of tax rather than the full rate on $500,000 of net income represents a tax saving of approximately $70,000.
A CCPC in Ontario with passive investment assets of $1.4 million at a 5% rate of return would earn $70,000 of investment income. This reduces the business income that would be taxed at the small business rate from $500,000 to $400,000. This represents a tax increase of $14,000 in respect of the $100,000 that is now taxed at the higher rate.
A CCPC with passive investment assets of $3 million or more pays the higher corporate tax rate on all its business income.
The tax paid by a CCPC on its investment income, in Ontario, is approximately 50.2%.
As I stated above, if a CCPC earns $50,000 of investment income, there is no change to the tax paid on the active business income.
However, if the CCPC earns $150,000 of investment income, assuming a full $500,000 of active business income, the tax cost in respect of the additional $100,000 is $120,200. This is the actual investment income tax of $50,200 PLUS the $70,000 of additional tax on its active business income.
Exempt spouses from Justin Trudeau’s tax increases on small business dividends
The introduction of the new Tax On Split Income (TOSI) rules was one of the most controversial provisions introduced by the Liberals in July, 2017. Although it was amended slightly, it still remains unmanageably complex and onerous. It must be recognized that this is a direct attack on professionals and small businesses who have done their estate and retirement planning based on rules that have been in force for decades. Although touted as a measure to ensure that “wealthy professionals” pay their fair share, it is also an attack on the families of painters, plumbers, electricians and any other business whose revenue depends upon the provision of services.
We have had a TOSI (commonly known as “kiddie tax”) since 1990, to prevent taxpayers from paying dividends to minors.
The Trudeau Liberals introduced rules to prevent dividends being paid to any family members who are not active in the business, subject to some very complex exceptions
Morneau introduced rules so complex that they are incapable of being administered. The current, and immediately previous, Chief Justice of the Tax Court of Canada have both stated publicly that the Tax Court does not have the capacity to cope with the volume of legislation that these new rules will generate.
The Conservatives have proposed exempting spouses of the active shareholder from the application of these rules.
This would be a big boon to small business, even if it takes huge amounts of work away from tax lawyers and accountants.