On July 18, 2017, the Department of Finance released its consultation policy paper on the taxation of private corporations first announced in Budget 2017, along with proposed legislation on some of the topics addressed.
The Minister’s introductory letter acknowledges the Government’s objective of reducing taxes on the middle class and raising taxes on the richest one percent of Canadians. The proposed changes will, however, have much broader implications than the Government’s stated mandate. If enacted, the proposals will significantly affect most Canadian private corporations, including family businesses, farmers, independent contractors, self-employed tradespeople, and incorporated professionals. Furthermore, new income-splitting proposals specifically target stay-at-home spouses and young Canadians who are attending post-secondary education.
Here is a quick summary of some of the key tax changes proposed by the Federal Government:
- Do you employ family members? The Government wants to scrutinize their compensation to apply a much higher tax rate on income they consider “unreasonable”.
- Do you pay dividends to family members? The Government is proposing tax dividends to children between the ages of 18 to 24 at the highest combined tax rate. Dividends to non-active spouses will be under scrutiny as well.
- Do you invest the profits from your business? The Federal Government is proposing to tax that income at an effective rate of 70%.
- Do you want to pass your business on to your children? Tough new rules make it difficult for younger kids to get the capital gains exemption.
Small and medium-sized businesses (SMEs) are the engine of the Canadian economy – estimates range from 85 to 90% of all businesses in Canada are SMEs.
We have attached a template letter to send to your local Member of Parliament. Government needs to know that this tax reform will harm businesses of all sizes.
Don’t know where to send the message to your Member of Parliament? Look up their address using your postal code.
EPR MAPLE RIDGE LANGLEY
CHARTERED PROFESSIONAL ACCOUNTANTS
Your shareholder loan account is made up of all capital that you contribute to the corporation and all purchases made on behalf of the corporation using personal funds or personal credit cards netted against cash withdrawals and personal expenses paid by the company on your behalf.
As long as you do not withdraw more than what you initially contributed to the business, you can withdraw the balance of your shareholder loan account on a tax-free basis. If you draw too much money from your business so that you end up owing the corporation money, you have one year from your fiscal year-end date to pay it back. This can be repaid either via direct repayment, salaries or dividends. If the amount is not repaid, the amount of the loan will be included in full on your personal income tax return.
Withdrawals from your shareholder loan account include cash, personal expenses paid by the corporation, and property transferred to you personally. If you take property out of the corporation be sure that you transfer the asset at the fair market value just as if you purchased it from a company that you had no interest in.
Interest does not have to be paid on the amounts owing to the shareholder however, if interest is paid, then a legal contract should be drawn up stating an obligation to pay interest and the actual amount of the interest. The interest paid on the shareholder loan is then deductible to the corporation and taxable to the shareholder.
CRA has specific rules about corporate shareholder loans. Since corporations often pay tax at preferred rates, CRA is concerned that owners could take money out of their company without paying personal income tax on it. CRA specifies that if a shareholder owes money to the company on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s income tax return. It also notes that a series of loans and repayments will be viewed as one continuous loan. This prevents the shareholder from paying the loan off just prior to year-end and then re-borrowing the money just after year-end so the loan does not show up on the balance sheet.
You need to be continuously aware of your shareholder loan balance. From a tax perspective, it is often advantageous to eliminate the amount that you owe the company by issuing a bonus or declaring a dividend to the shareholder rather than having the amount included on your personal income tax return by CRA.
For more information on shareholder loans, please contact your EPR office.
Reprinted with permission from EPR Canada.
By Paul Walker, Partner, EPR Maple Ridge Langley White Rock
If you expect your taxable income to exceed $200,000 in 2016, consider accelerating bonus payments, salaries, allowances, and severance payments into 2015 instead of 2016, and deferring deductions to 2016 instead of claiming in 2015.
If your income for 2015 falls below $200,000, consider deferring the above mentioned income to 2016 and accelerating deductions to 2015.