What is the expected impact of the small business tax cut?

It was one of the election promises that Justin Trudeau quickly put on the shelf. Tax reform for small and medium-sized businesses is back in the spotlight. It aims to reduce tax loopholes used by an increasing number of entrepreneurs.

Recently, Ottawa announced the first steps the government plans to take, including reducing taxes for small and medium-sized businesses from 10.5% to 9% by 2019.

What impact will this measure have on your SME?

Note that all this information is unofficial as of October 2017, and we must wait for the new information to arrive in the March 2018 federal budget.

Significant savings for SMEs?

According to the Canadian Federation of Independent Business, the Canadian business tax cut will lead to savings of $815 million a year.

This equates to a gain of $7,000 to $7,500 a year for modest income, middle-class small business owners. These are welcome savings for business leaders who often have little room for maneuver when it comes to investing.

However, many voices have protested against this reform. The CEO of the Quebec Federation of Chambers of Commerce is worried that this reform may widen the gap between the middle class and entrepreneurs. According to him, many entrepreneurs have used tax cuts to do things other than invest.

Tax cut effects on family inheritance

A few months ago, the Trudeau government considered tightening the tax holiday on the capital gain generated during the sale of a company's shares. Ottawa has finally backed down to avoid restricting access to the lifetime capital gains exemption, and avoid interfering with intergenerational transfers from a family business.

The cumulative exemption allows an owner that sells their business to pay less tax on the profits from the sale, up to $836,716 during his lifetime. However, Finance Minister Bill Morneau has decided to end income splitting for family members who do not contribute to the business. And for the first time, the contribution criteria have been clearly defined.

Four basic principles are taken into account: capital inflows, labor inputs, participation in financial risks and prior contributions to labor, capital and risk.

Tax cuts: impact of the announcement?

Many voices are rising against these government announcements, fearing the impact of the announcement will end criticism of the tax reform announced by Minister Morneau a few months ago. This reform aimed to fight against the constitution of small companies by rich individuals to drastically reduce their taxes.

On the opposition side, the Conservatives are denouncing the injustice of this tax cut for SMEs, to make us forget the outcry provoked by the announcement of the Morneau reform.

Certain people even say that in the end, this reform will increase the amount taxpayers have to pay.

Future developments

This is the consultation period for the SME tax reform and nothing has been put in place yet. These proposals were strongly criticized by the opposition, but also by many Liberals. There is still a way to go before the reform is implemented and the debates in the coming months promise to be heated.

The main purpose of this announcement is to ensure that the lowest tax rate is not used as an unfair tax strategy and must be followed by new statements from the Trudeau government.

If you want to learn more about the repercussions this reform will have on your company, don’t hesitate to call on our services. It will be our pleasure to help you more clearly understand the subject.

Note that all this information is unofficial as of October 2017, and we must wait for the new information to arrive in the March 2018 federal budget.