Small Business Taxation

By Dave Faulkner   November 2nd, 2017

Image from Globe and Mail, October 16, 2017.

It has been two weeks since the Federal government announced, over lunch at the Pastaggio Italian Eatery, changes to the small-business tax rate from 10.5% to 9% by 2019. This decrease in the small business tax rate is a campaign promise that has been accelerated because of the backlash the Federal government felt over the small business tax changes proposed on July 18th, 2017.  The changes to small business taxation touched on 4 areas:

  1. Income Sprinkling
  2. Lifetime Capital Gains Exemption (LCGE)
  3. Conversion of a corporation’s regular income into capital gains
  4. Taxation of passive investment income

So, after a week of daily new announcements from Finance, here is what we know:

  • For now, we do not need to worry about changes to the Lifetime Capital Gains Exemption (LCGE) or the conversion of dividends to capital gains.
  • There will be changes to income splitting (TOSI) rules, details are promised by end of 2017.
  • There will be changes to passive investment income, draft legislation will be provided as part of Budget 2018.
  • Individual Pension Plans (IPPs) may become more relevant in tax planning given the proposed $50,000 limit on passive investment income.
  • Life insurance remains a powerful planning tool for small business owners, both as a tax shelter and estate planning tool.
  • Living benefits, structured using a shared ownership arrangement, still offers tremendous value in retirement planning.

The video below explains why finance had an issue, how they planned to make things fair and what their current position is today.

One of the biggest contentions of the changes proposed was a lack of analysis to back up Finance’s claim that average Canadian business owners would not be impacted by these proposals. So as the CEO of a company that provides financial planning software to financial advisors, I had a special version of RazorPlan deployed that included the tax changes from the July 18th proposals. I used this version to run a case study on an average business owner that is 10 years from retirement, using progressive tax rates, to determine just how accurate Finance’s claim is.

The video below explains the results of my case study.

As a financial advisor, what should you do?

  1. You need to help clients understand how the proposed changes and any future changes to the Income Tax Act (ITA) could impact their financial security (retirement and estate plans).
  2. Your clients need a financial plan, before and after any tax changes go into effect, to develop their personal strategy to minimize the impact that any new taxes may have on their future.
  3. Make plans to meet with all your small business clients before the 2018 budget.

To help financial advisors explain the pending tax changes to their small business clients, I am making the PowerPoint* presentation used in the above videos available with no strings attached.  You can modify it to add your branding and logo as well as add or remove pages. To download an unprotected version of the PowerPoint, click here.

*This PowerPoint presentation is provided as-is and does not constitute financial advice. Any recommendations made, or advice provided is the sole responsibility of the user. You should consult with a tax specialist before implementing any financial strategy.

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