Canada’s Income Tax Act changes face criticism

Ottawa – The Canadian Federation of Independent Business is disappointed with what it calls the government’s last-minute release of new “income sprinkling” rules for private businesses.

After announcing changes to the Income Tax Act last week, finance minister Bill Morneau continued to clarify the changes to the rules, specifically regarding “income sprinkling.” The term refers to private businesses dividing profits among employed family members who may be taxed at a lower rate.

In a news release, the CFIB called on Ottawa to delay implementating the changes until Jan. 1, 2019.

“It is extremely concerning to see the federal government drop this lump of coal during the busiest season for hundreds of thousands of firms and only days before all small business owners are expected to implement the new rules. This seems the very opposite of tax fairness,” said Dan Kelly, CFIB president, in the release.

In October, CFIB welcomed several of the government’s adjustments to its suite of proposed tax changes, including a new commitment to release the draft legislative proposals for income sprinkling.

“After signs the government was starting to listen to the voices of entrepreneurs, this is another blow,” Kelly said. “It is particularly worrisome that these changes have not been legislated or studied to ensure there are no unintended consequences.”

The CFIB said it recognizes government has attempted improvements by excluding some family businesses from the new rules, which includes spouses of business owners over age 65.

“While the bright-line test may offer relief to some families, the Canada Revenue Agency will still need to determine whether a firm qualifies for the exemption,” Kelly said. “We remain concerned that the new income sprinkling provisions won’t take into account many of the formal and informal ways family members participate in the business.

“Business owners will be worried that they could see their red tape burden increase significantly in order to prove they qualify for one of the exemptions or can meet the ‘meaningful contribution’ test.”

The organization made reference to the Senate Finance Committee report, released the same day changes were announced, which states that the “income sprinkling proposal will be complicated to apply, require significant paperwork, and rely on the subjective determination of tax auditors, inevitably leading to inconsistency and litigation.”

The Senate has recommended the entire package of changes be dropped and replaced with an independent review, noting that if government does go ahead, it should delay implementation to 2019, the release said.

The CFIB will continue to review the revised proposals and seek input from tax professionals.