New tax rules for small businesses in Canada | Business Lawyer

The Federal Government of Canada recently announced major changes to small business taxation. If you own an incorporated small business then this blog is meant for you, in this blog I will review these new tax changes and explain how they may impact you. 

Increase in dividend tax 

The government will increase the tax on dividends paid to family members that are shareholders of a small business corporation effective January 1st 2018. 
For example, assume that Mrs. Nancy Johnson and Mr. Kevin Johnson are shareholders in a medical professional corporation Nancy's the sole doctor and works in the corporation while her husband is a non active shareholder, every year the corporation pays Nancy and Kevin a dividend of $100,000 each in respect of their shareholders. Under the previous rules Nancy and Kevin each pay tax at regular tax rates on the dividends they received in the year, under the new rules the dividends paid to Kevin are taxed at the highest marginal rate this is because Kevin does not work in the medical practice and he has not made any major financial investment in the practice.
As a result of the new rules Kevin's personal tax will increase from fourteen thousand nine hundred eighty six dollars to forty five thousand three hundred dollars on one hundred thousand of dividend income. As you can see the government does not want you to save tax any more by paying dividends to family members.

Family trusts 

The government has stopped the practice of multiplying the lifetime capital gains exemption with multiple family members through the use of a family trust. The new rules are effective January 1st 2018 under the old tax regime beneficiaries of a trust that own shares of a small business corporation could each claim the lifetime capital gains exemption. For example assume that Uncle Bob runs a successful cheese-making Factory, Uncle Bob is very generous and has made his spouse and Bobette and three children tiny big and sloppy beneficiaries of his family trust his family Trust is the sole owner of cheesery Inc. Assume that uncle Bob receives an offer from the Big Cheese Manning to purchase his company. She is ranked for three million two hundred thousand dollars, Uncle Bob accepts the offer and no tax is payable on the sale because each beneficiary of the trust claimed the lifetime capital gains exemption on the sale of the shares as you can see from the chart the lifetime capital gains. Exemption was allowed for each beneficiary and so no tax was paid on the sale.
The government has stopped this tax planning tool under the new rules by preventing beneficiaries of a family trust from claiming the lifetime capital gains exemption if uncle bob had sold his company under the new rules the total tax paid by all the beneficiaries in respect of the sale would be eight hundred and sixty four thousand dollars.

Tax on investment income

The government is proposing to increase the tax paid by small business corporations on the investment income that it earns including interest rents royalties and dividends if the proposals are put into law then the tax rate on investment income earned by a corporation would increase to effectively 50% without any tax relief in addition when the investment income is distributed by the corporation to its shareholders the shareholders would pay personal tax on the dividends received at a rate of fifty four percent the combined corporate tax rate and personal tax rate on investment income distributed is approximately 77%.
Location: Toronto, ON, Canada

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