On March 22nd, 2016 the new federal Liberal government will
table its first budget and members of the tax community are
expecting a number of tax changes that could significantly impact
owner–managers of Canadian businesses. The Liberal
Party's platform mentioned several tax changes with many having
already been introduced by legislation or announcement, such as the
changes to personal tax rates for 2016 that were announced on
December 7th, 2015. Those changes included a reduction in the tax
rate for all individuals with income subject to tax in the second
lowest tax bracket ($45,282 to $90,563 of taxable income) and the
introduction of a new top federal tax rate of 33% for individuals
with taxable income in excess of $200,000. Tax rates relating to
the investment income tax regime for Canadian-controlled private
corporations were also revised.
These are our predictions on certain tax changes that may be
announced in the upcoming federal budget which may impact
owner-manager tax planning. Crowe MacKay's experienced tax team
can assist in navigating any such changes for both you and your
The Small Business Tax Rate
The Liberal Party's platform stated their intention to
ensure that the low rate of corporate tax on active business income
of Canadian-controlled private corporations is not available to
high-income earning Canadians for income deferral or
income-splitting. The complexity of rules in this area could well
impact many small businesses or start up operations if the
Department of Finance follows the approach taken in Quebec, which
imposed restrictions on access to the low corporate tax rate
depending upon the number of active employees employed by a
corporation. Alternatively, if the Department of Finance follows
the Personal Service Business rules, this may result in combined
corporate and personal income taxes approaching 60% of the income
The Chartered Professional Accountants of Canada and other
organizations have asked the Department of Finance to consult the
tax community and review the approach to be taken to avoid
unintended consequences and unnecessary complexity in the rules.
Contrary to certain articles in the media, the tax community has
not lobbied the government on preservation of the current system
but rather has pointed out its challenges which should be addressed
with any major revision of corporate and personal taxation, as it
deserves broader discussion.
Any proposed rule changes could impact only incorporated
professionals, or they could be broad enough to affect small
businesses in other industries.
Sale of business assets and capital gains
There is speculation that the federal budget may also contain
measures that will affect the sale of business assets including the
1. The conversion of goodwill or quota sales to capital
gains and/or recapture rather than the current eligible capital
property approach. These tax changes were proposed more than two
years ago and could increase taxation of these sales. Currently
these sales are eligible for either the low rate of corporate tax
or the general rate, both of which provide an opportunity for tax
deferral. If introduced, the new rules could treat these sales as
capital gains and/or recapture on depreciable property.
2. The increase of the capital gain inclusion rate. In the 1990s
the capital gain inclusion rate was 75% and recently the increase
in tax rates on dividends has distorted the tax neutrality of
dividends rather than capital gains to the point of creating tax
conversion activity. Today it is often much more favourable to
receive capital gains than dividends.
Our full commentary on the federal budget proposals will be made
available shortly after they are announced on March 22nd. The Crowe
MacKay team is here to help you address any changes that
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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