Do you own a small business in Canada? Is your business incorporated? If you want to fulfill your tax obligation and always ensure you’re compliant, take time to understand the new tax rules and how they will affect your business in 2018. In the paragraphs below, we will cover some tax changes that the government will implement in the coming year. We’ll let you know how your small business may be affected and what you’ll need to do to remain compliant.
Increase In Tax Paid On Dividends
If you have family members in your business who earn a dividend every year, they are likely to pay more taxes on this dividend effective January 1st, 2018. Therefore, if you have family members who are part of your small business and receive a dividend, you need to make this change when filing returns. Family members will therefore not pay the regular tax rates on their dividends and this applies in each year. Under the new rules, the dividends can be taxed at the highest marginal rates.
This change was made to target small business owners who use income sprinkling as a way to lower their corporate tax return. Income sprinkling is a strategy where the business owner splits his/her income among the family members in order to reduce their tax bill. Therefore, if you allow your family members to make major financial investments in the business, expect them to bear the tax burden. This move is a clear indication that the government doesn’t want you to save on taxes by distributing your income in the form of dividends to other family members.
The new rule also affects family trusts. With the changes which will be effected on January 1, 2018, multiple family members who are beneficiaries of a trust can no longer claim the lifetime capital gains exemption. There were situations where no tax was payable after a sale of shares because each of the beneficiaries of the trust claimed lifetime capital gains exemption. The government wants to eliminate this and ensure that not everyone within the family can qualify for the lifetime capital gains exemption.
Increase In Tax On Investment Income
The other major tax change involves the government’s proposal to increase the amount of tax that is paid by small businesses on investment income. This includes the income it earns on interest, rent, royalties, and dividends. This proposal is yet to be put into law. If put into law, the tax rate that is earned by a corporation on investment income will increase to 50% without any tax relief. In the case where this income is distributed to other shareholders, they will be required to pay personal income tax at a rate of 54%. Additionally, if the proposal is passed, the combined corporate and personal tax on investment income will be approximately 77%.
To find out more about the tax changes that may affect your small business in 2018, get in touch with a qualified CPA. Getting this information ahead of time will help you prepare and avoid serious penalties and interests.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.