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Proposed tax changes a ‘renewed attack’ on job creators

By Dennis Nerland

The Department of Finance released new proposed tax legislation and policy on July 17, 2017. The new policies target income splitting in private corporations, access to the capital gains exemption through family trusts, and corporate-owned passive investments. These amendments signal a renewed attack on small and medium-sized businesses and business-owners, tipping the scales further in favour of large corporate oligopolies.

The proposed amendments are a surprising move from the Liberal government. The tax changes do not reduce taxes on lower-income families and are not particularly prejudicial to the extremely wealthy or ultra high-net-worth individuals. Rather, they disproportionately impact job creators, small and medium-sized businesses, and middle-class and upper-middle-class entrepreneurs. These changes seem to be a revenue-generation tool and a tax hike on job creators, disguised as a general policy of fairness.

The new tax proposals are designed to defeat the most prevalent business structures used by small and medium-sized business owners in Canada. Previously, tax benefits and incentives were available to small businesses structured with holding companies and family trusts. This business structuring has been approved by the Supreme Court of Canada and the Canada Revenue Agency for decades, and the planning is so common as to be trite.

The sheer prevalence of these structures has created certainty and comfort in our tax system. Entrepreneurs have relied on these structures for decades in operating their businesses. The new tax proposals introduce significant uncertainty and cost for these entrepreneurs, materially affecting the risk/reward analysis involved in opening a new small business.

The Liberal government has carelessly cast off the tax certainty of operating in the small-business realm and smothered the economic incentive previously available to small business owners. These sudden, broad-reaching and unexpected changes will require business owners to re-evaluate their risks and decide whether it is feasible to continue competing against large established corporations.

At this time, draft legislation has been introduced to prevent income splitting in private businesses and to severely limit access to the capital gains exemption. Although the legislation is formally under consultation, we anticipate that it will be enacted in substantially this form. These new rules will take effect on Jan. 1, 2018, so there is some time remaining to implement planning under the old rules.

The Department of Finance has also released a policy regarding the taxation of passive corporate-owned investments. No draft legislation is yet available. These changes, if implemented, will have broad-reaching effects. Tax professionals across the country are encouraged to discuss these changes with the Department of Finance.

Calgary tax and fiduciary services lawyer Dennis Nerland is a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice.

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