Liberal plan to close tax loopholes has raised questions: Here’s a look at 3 of them – Politics

Ever since Finance Minister Bill Morneau announced he was going to close tax loopholes used by private corporations, there has been a growing backlash from small businesses and professionals.

Morneau pitched the change as necessary to ensure the wealthy were not paying less tax than the middle class.

But fast forward a couple of months and the grumbling has become a raging roar.

The Coalition for Small Business Tax Fairness, a group of 35 organizations from across the country, joined forces to present a unified voice against the proposed move.

The coalition effectively led by the Canadian Chamber of Commerce includes associations representing farmers, builders, retail stores, accountants, lawyers, doctors and others.

Morneau has asked for Canadians to weigh in on his proposed tax changes, with a deadline of Oct. 2. 

In the meantime, those proposed changes have sparked a number of questions.

Will it still be OK to pay family members through a business?

One of the practices the Liberals want to stop is business owners dividing up their income by paying family through a dividend, money that they would otherwise pay themselves at a higher rate of tax.

If a business owner were to pay a spouse or child a straight salary, that salary has to face a reasonableness test to ensure that the pay they receive is earned.

“If a three-year-old child doesn’t work in your business you can’t really pay them a $10,000 salary, but there is no such provision for a dividend for a three-year-old child, because dividends never had a reasonableness clause,” explains David Steinberg, an accountant and partner at Ernst & Young Canada.

Steinberg notes the government is likely targeting self-employed professionals who incorporate and essentially operate a business of one, but reduce their taxes by spreading money around their family.

But by casting the net so wide, Steinberg said, the change will effect small family-run businesses or farms where members of a family do perform legitimate roles, forcing the business to justify their earnings against yet to be undefined criteria.

Will small businesses be able to avoid taxes by investing profits?

The short answer is no.

At present a small business that makes a profit will pay corporate tax on that profit. The top combined small business tax rate in Canada is 14.4 per cent.  

If the business owner decides to use that after-tax profit to pay themselves a dividend, taking the money out of the business,…

Read the full article from the Source…

Leave a Reply

Your email address will not be published. Required fields are marked *