Tax Uncertainty Sours the Holiday Spirit for Canadian Business Owners

As thoughts turn to the holidays and celebrating the new year, Canadian business owners aren’t feeling the cheer. Instead, they’re busy trying to make the best decisions for the future of their businesses and families despite unclear information from the federal government on income sprinkling and passive investments.

Income sprinkling and passive investments are both important planning tools, yet the continued uncertainty makes confident decision making nearly impossible. There are simply too many unanswered questions. Many small business owners want to take steps to mitigate the impact of these proposals before the end of 2017, but they’re left wondering what the best move is for their businesses, employees, and families. After the initial consultation period ended in October, the federal government said it would be revising the proposed legislation on income sprinkling released this summer. However, they also reiterated these revisions would still be effective January 1, 2018. Unfortunately, planning time is dwindling and we haven’t seen the new legislation Canadians were promised.

The government said the revisions to income sprinkling would create clarity and simplicity around the ‘reasonableness’ requirement. That has yet to materialize. We know that the reasonableness test will not reset in each taxation year, but rather look at all historical contributions by the family member, as well as all consideration that was previously paid to him or her. Business owners are left wondering whether an excess dividend paid in 2017 will impair the ability to pay a dividend to that family member in 2018 and later years.

The government has indicated it will work to grandfather existing passive investments, meaning that investments and savings that exist at the transition date, as well as future income earned on those assets, should not be subject to the passive income proposals. But this is not certain.

There are opposing goals in planning for income sprinkling and passive investments. Should an owner save less for the company and pay out more to family members now to minimize the impact of changes to income sprinkling? Or should they pay less dividends and put more into passive investments to capitalize on the grandfathering provisions? These opposing goals must be weighed against each other to determine the optimal course of action for each business owner. Without knowing the ultimate effect, an owner cannot confidently plan for their business.

Canadian business owners need time to understand what changes are coming for them to make the best possible plan for their company and families. 

For more information contact Loren Kroeker, Senior Vice President, Taxation Services, at 250.734.4330 or [email protected]