Corporate Tax

Canada’s Proposed Tax Changes - What Entrepreneurs Need to Know

Paul Sharpe, CPA, CA
/
November 21, 2017

Affiliate disclosure

There’s been a lot of chatter about the proposed tax changes for Canadian corporations but like most things tax-related, it isn’t exactly quick and easy to get the skinny on the impacts your business may face.  Not to worry, Avalon is here to explain the three most important things you need to know about these changes:

There’s been a lot of chatter about the proposed tax changes for Canadian corporations but like most things tax-related, it isn’t exactly quick and easy to get the skinny on the impacts your business may face.

Not to worry, Avalon is here to explain the three most important things you need to know about these changes:

1. Families that split income together may pay more tax together too

Income Splitting Today: Vivian is a dentist, she operates her business through a Canadian corporation. When she incorporated, Vivian was advised that it would be good tax planning to issue some shares to her husband Phil as well as her adult children Hilary and Carlton. Each year, she could save taxes by splitting the income that the corporation earns between her family members who would then pay less tax on this income at their lower marginal tax rates.

Income Splitting Under The New Rules: Vivian can still pay dividends to her family members out of the corporation, but Phil, Hilary and Carlton will have to prove that this income is reasonable for work that they have actually done in the business. If they can’t, they will pay tax on the dividends at the highest marginal rate.

2. Passive investments ain’t what they used to be

Passive Investments in a Corporation Today: George Michael runs a very successful chain of fruit stands.The corporation earns enough to pay all of its bills, George Michael’s hefty salary, and corporate income taxes. There’s also a large amount of cash leftover that George Michael would like to invest in passive investments such as stocks or private companies that are unrelated to his operations. By keeping the investment inside his company, George Michael avoids paying any personal tax on these funds until he wants to take the money out of the corporation at some future date.

Passive Investments Under The New Rules: The government would tax the passive investment income of private corporations at the top personal tax rate. This completely removes the tax-deferring advantages of passive corporate investments.

3. The Dividend and the Capital Gain

Corporate Capital Gains Today: Harvey has a successful legal practice. His accountant has used tax planning strategies to distribute the after-tax earnings of his corporation as capital gains instead of as dividends. Why you ask? Capital gains are generally taxed at a lower rate than dividends paid out of a Canadian private corporation so there can be a significant tax benefit.

Corporate Capital Gains Under The New Rules: The proposed changes aim to reduce Canadian business owners’ ability to use these tax planning strategies.

So What Does it all Mean?

The Bad News: If your business currently uses any of the three strategies, it’s possible that you will see an increase in overall tax burden when the changes come into effect in 2018.

The Good News: There are other tax planning methods that can can help you reduce your taxes. Hooray!

The Really Good News: There are so many benefits to operating a business in Canada through a corporation. Stay tuned! We’ll tell you more.

Need some advice about your corporation? Thinking of incorporating? Let’s Chat!

Work With Avalon

Our goal is to help small businesses thrive, and we want to help as many businesses as we can.

Here are a few ways that we can help ⬇️

🤝Hire Avalon
We offer full-service bookkeeping and accounting services for small businesses in Canada.

We start by helping incorporated businesses navigate the maze that is tax compliance in Canada. We provide clarity on your business' financial performance so you can make informed decisions with the guidance of our expert team.

If you're interested in hiring Avalon, check out our Services Page or get an idea of the Service Packages that we offer.

🏫Learn New Skills
For those wanting to learn the skills needed take on your own bookkeeping and accounting, we offer online courses.

We've taken our years of experience working with hundreds of small business owners and distilled them down into practical online lessons.

Check out our Business Courses page to take your skills to the next level.

📖Share Our Knowledge
We know that being a small business owner is challenging.  There are so many hurdles to overcome and questions to answer when running a business.

We aim to help as many business owners as possible to overcome those hurdles and answer those questions by sharing our knowledge.

Check out our Blog, YouTube Channel and Downloadable Guides that have helped thousands of people get answers to their questions.  

You can also sign up to our Weekly Newsletter to get tips from Joe on building a successful business.

We speak in plain language and put out the most useful content that we can.

Thanks for reading!
Article by
Paul Sharpe, CPA, CA
.
Originally published
November 21, 2017
.
If you enjoyed this article, please consider sharing!

Let's Get Started

Use the form below and we'll respond within two business days

How can we help?
Is your business incorporated?
What's your  annual revenue?
$0
Tell us about the services you require or advice you need

Want to hear more business tips?

Sign up to our newsletter to get tax and business tips from Joe as well as his expert insight into running a successful business.