The CRA knows this a weakness and so they are focusing on this as source of increased tax revenue.
BIM: What will happen to Small Businesses with employees? Are there any changes to payroll taxes businesses need to be aware of?
Arden Vanderhorst: The good news is that the Liberals have said that they will reduce EI Premiums, however the bad news is that it will not be as much as the Conservatives would have. This will reduce the savings that employers can realize on payroll taxes.
The worst news is that the Liberals are committed to raising CPP benefits, which means that CPP contributions will increase with it thus creating more burden on employers.
The only silver lining to this might be that Premier Wynne has said that if CPP is increased, she may reduce or eliminate the Ontario Retirement Pension Plan that is slated to come into effect in 2017.
BIM: What about Corporate Taxes? Is there anything new there businesses should be aware of?
Arden Vanderhorst: The Liberals have said they will commit to lowering the small business rate that corporations pay from 11% to 9% over 4 years starting in 2016. Business owners who feel they can benefit from this can use legitimate ways to defer income from 2015 to 2016 or beyond. Some of these strategies overlap with some of the issues mentioned above with respect to the higher rates for high income earners.
The Liberals have also stated they want to ensure the corporations are not used to reduce personal income tax for high-income earners. No details have been provided about this, but it has somewhat disturbing overtones.
BIM: Any other things you are seeing relevant to owners of corporations?
Arden Vanderhorst: In my practice I meet lots of individuals who in order to get a contract or position had to incorporate a company. Essentially this corporation only has one client and if it weren’t for the corporation, they would be an employee. These are called Personal Services Businesses (or PSB’s).
In 2011, the CRA stripped these corporations of the benefits that other small businesses have such that PSB’s are subject to the highest rate of tax and the only expense they are essentially entitled to is the salary paid to the owner/manager.
What is not surprising is that many people don’t like the rules inflicted on PSB’s but it’s very surprising how many individuals are not being informed of this by their tax preparers and the danger now is we are beginning to see increased audit activity as CRA sees this area as rampant with non-compliance.
If you think your corporation may be a PSB, it is recommended you have a discussion with a tax professional as to the factors the CRA looks at as well as the tax implications that would occur.
BIM: What about owners with several closely held corporations?
Arden Vanderhorst: In 2015 the CRA released new rules that may impact the way corporations pay dividends to holding companies after April 20, 2015.
The CRA has not provided clarity on the new rules, but for corporate groups in my practice, we are ensuring we are onside with the strict interpretations of the rules or, for the most part, we are trying to hold off paying intercorporate dividend payments until the CRA clarifies their position on these rules.
BIM: Have the new personal tax rates for 2016 affected corporations in any way?
Arden Vanderhorst: Yes, in concert with the increase in personal tax rates, the government is making it less beneficial (read – more expensive) to earn investment income in private corporations. I still believe there are opportunities for a business owner to build a retirement nest egg that is better than an RRSP, but it is not as beneficial as it was.
BIM: What do you see happening next for owners of corporations? What should they know?
Arden Vanderhorst: One area of concern in my mind is comments that the Prime Minister made during the election, making it clear his government is not fond of individuals using their corporations to avoid tax within the confines of the rules.
There are no concrete details, but doctors and lawyers, and possibly other incorporated professionals, should be aware that they may be in the government’s target sights.
There are also rumors that the government may adopt something similar to what Quebec is phasing in, meaning that in order to access the preferential rates of corporate taxes, you need to have more than 3 full time employees. That is scary when you think of all the small businesses that run our economy and represent economic growth and innovation.
At what point does a small business owner throw their arms up in the air and say, “Why should I hire more people if I am only going to lose 53.53% of the additional profit to taxes?”
BIM: What about Estates and Trusts? Is there anything there we should be aware of?
Arden Vanderhorst: There are many changes occurring to the taxation of trusts. While too extensive to cover in a few minutes, the basic change is that starting January 2016, an Estate will only be allowed to benefit from the graduated rates of tax for the first 36 months after an individual’s death. After this 36 month period, the trust will be subject to tax at the highest marginal rates from the first $1 of taxable income.
Previously, these graduated rates were available indefinitely and have been utilized to reduce tax burdens. There is no exemption for previously created trusts. If you are the Executor of an Estate, you should consult your tax professional for more details about these changes.