All of the talk about tax reform, this week, may have some people confused. After all, the tax code isn’t exactly the easiest thing to read.
Federal Finance Minister Bill Morneau said small business owners have an unfair advantage that could create two classes of Canadians, arguing the current system is unsustainable.
Terri Holowath, Managing Partner at Catalyst Accountants and Taxation, said despite Morneau’s assertion, proposed tax changes will have a disproportionate effect on family owned businesses.
“The legislation is very broad and it will have an impact not only on the wealthiest of Canadians, but a lot of small and mid-sized businesses,” she said.
She used the example of a feedlot company, owned by five unrelated individuals, where only one is actively engaged in the business.
“That company can declare a proportionate dividend to the five unrelated share holders with no adverse consequences to the four inactive share holders under the draft legislation,” she explained.
But if those people were related, there would be a huge tax hit if the inactive shareholders were paid a dividend.
Holowath said it also affects people looking at retirement, using the example of ranchers whose wealth typically lies in land and herds.
“Mom and dad, they sell the heard within the company, we pay the corporate small business rate of 12.5 per cent, which is what it is right now, and the cattle are converted into cash,” she explained.
The ranchers also pay a low personal tax rate, but under changes to the passive investment rules, Holowath said they could be taxed at an effective rate of 70 per cent.