Senators mull income-sprinkling deferral for small businesses

Proposed amendments set stage for spats

OTTAWA • Senators are mulling several amendments to the government’s sprawling budget bill, potentially reviving spats over Ottawa’s tax changes on small businesses that came into effect earlier this year.

Business representatives warned senators on Tuesday that tax changes by Ottawa to limit the “sprinkling” of income within small businesses is causing widespread confusion for company owners, many of whom remain uncertain about how the changes will apply to their businesses, despite the policy being introduced in January. Several representatives called on the Senate national finance committee to defer the introduction of income sprinkling, as well as request new exemptions to the tax policy.

The requests came after the Liberal Party proposed a suite of small business tax changes last summer, including limits on income sprinkling between family members, tax increases on some passive investments, and higher taxes on certain capital gains. The proposals caused intense backlash from business owners, forcing Ottawa to rein in most of the changes.

But critics say businesses are still pushing back against a few of the remaining tax changes, and say private firms didn’t have enough time to prepare for the new policy.

“There is a degree of anger on the part of small business owners, a degree of upset that hasn’t gone away yet,” Dan Kelly, president and CEO of the Canadian Federation of Independent Business, told the Senate Finance Committee Tuesday.

“There has been very little progress — virtually no progress — in the simplicity respecting the income splitting rules,” he said.

One problem for businesses, Kelly said, is a lack of clarity around whether certain firms will be subject to socalled “bright-line” tests by the Canada Revenue Agency, which are meant to decipher whether family members are eligible for income sprinkling. Small companies often don’t track the information needed to meet the thresholds — like counting how many hours per week various family members work for the business, for example. Some argue that determining what constitutes “work” is also unclear.

“Small firms by their very nature are much more informal than the larger firms,” Kelly said. “If you go and visit these business owners, they’ve got a rusty filing cabinet where they’re throwing every receipt and piece of paper that they possibly can, hoping to gosh that the CRA is not going to be knocking on the door anytime soon.”

Small firms now face “severe uncertainty” as they look to prepare their taxes for next year, said Trevin Stratton, chief economist at the Canadian Chamber of Commerce.

Bruce Ball of the Chartered Professional Accountants of Canada called the changes “complex and difficult to apply in practice” during committee meetings Tuesday.

Several senators told the Financial Post they are now considering amendments to defer the introduction of income-sprinkling provisions for one year until Jan 1., 2019, as well as an exemption from the tax for spouses of business owners. The income sprinkling policy came into effect in January, while the passive investment changes will be officially introduced in 2019.

The Senate Finance Committee released a report last year urging the government to delay the tax changes to 2019, which was ignored.

Senators have also raised alarm over the so-called “excise tax” on cannabis that was introduced as part of Bill C-74, Ottawa’s Budget Implementation Act, and have raised questions over the implementation of a carbon tax that was also folded into the sweeping legislation.

“I have a feeling there’s going to be some action on this,” said Anne Cools, an independent senator representing Toronto Centre-York.

Senators also stressed that the committee is in the early stages of studying the bill.

Criticism of Ottawa’s small business tax changes died down after the government eliminated its proposal to tax capital gains at a higher rate, and introduced a $50,000 threshold on passive investments.

But several businesses still worry that stricter limits to income sprinkling could add an additional tax burden on companies with limited cash flows.

“All of this has huge impacts and unintended consequences,” said Nadia Alam, the president of the Ontario Medical Association. “Income splitting becomes very impactful when business owners are the sole income earner."