OTTAWA â Senators are mulling several amendments to the governmentâs sprawling budget bill, potentially reviving spats over Ottawaâs 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 âsprinklingâ 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 didnât have enough time to prepare for the new policy.
âThere is a degree of anger on the part of small business owners, a degree of upset that hasnât gone away yet,â Dan Kelly, president and CEO of the Canadian Federation of Independent Business, told the senate finance committee Tuesday.
âThere has been very little progressâvirtually no progressâin the simplicity respecting the income splitting rules,â he said.
One problem for businesses, Kelly said, is a lack of clarity around whether certain firms will be subject to so-called âbright-lineâ tests by the Canada Revenue Agency, which are meant to decipher whether family members are eligible for income sprinkling. Small companies often donât track the information needed to meet the thresholdsâlike counting how many hours per week various family members work for the business, for example. Some argue that determining what constitutes âworkâ is also unclear.Â
âSmall firms by their very nature are much more informal than the larger firms,â Kelly said. âIf you go and visit these business owners, theyâve got a rusty filing cabinet where theyâre 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.â
Small firms now face âsevere uncertaintyâ 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 âcomplex and difficult to apply in practiceâ during committee meetings Tuesday.
Several senators told the Financial Post Tuesday 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 âexcise taxâ on cannabis that was introduced as part of Bill C-74, Ottawaâs Budget Implementation Act, and have raised questions over theÂ implementation of a carbon tax that was also folded into the sweeping legislation.
âI have a feeling thereâs going to be some action on this,â 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.Â The committee is currently doing its pre-study of the bill, and expects to receive the legislation in coming weeks.
Criticism of Ottawaâs 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.
âAll of this has huge impacts and unintended consequences,â said Nadia Alam, the president of the Ontario Medical Association. âIncome splitting becomes very impactful when business owners are the sole income earner.â
First published at http://business.financialpost.com/entrepreneur/small-business/senators-mull-deferral-of-income-sprinkling-for-small-businesses-amid-severe-uncertainty