Five unanswered questions about the Liberals’ proposed small-business tax Affects

Small-business owners stay in limbo over how Ottawa’s most recent proposed tax changes will affect their livelihoods. While the federal Liberal government recently removed a number of the contentious proposals tabled in July, there is still uncertainty around pending adjustments to income sprinkling and a cap on passive investments.

Ottawa says it is moving ahead with plans to prevent income sprinkling for family members that aren’t “meaningfully” leading to the company and promises to “simplify” the proposal in the weeks ahead. The government is also likely to put a higher tax on passive investment income within an integrated company that exceeds $50,000 annually. Ottawa needs the earnings sprinkling rule to begin on Jan. 1, 2018 and states the draft legislation to the passive income changes will be published in the upcoming federal budget, which is normally published in between February and April.

Meantime, business owners, together with their accountants and financial advisors, have a good deal of questions about how the potential changes will work. Following are a few of the unanswered questions about what Ottawa has on the table.

How will the new revenue sprinkling rules work, exactly?

The government says it intends to simplify the proposal and present a “reasonableness test” for household members to prove they are active in the company and qualify for the tax advantage. Business owners are searching for additional information on how that evaluation will work and what’s going to be simplified — and time is running out. “We’re two months away from principles that we must play {}, and we do not even know what the rules are,” says Michael Gorniak, a partner at Saskatoon-based accounting firm Thomson Jaspar. Business owners are attempting to find out if they have to take complete advantage of present income sprinkling rules before the end of the year.

When will the new passive principles start?

The government says it’s going to introduce draft laws with its 2018 budget, but what everybody is attempting to find out is when they will kick in. Ottawa has said all previous investments will be protected along with the brand new $50,000 annual threshold will be on a “go-forward basis.” When does the future begin? Marc Lamontagne, founding partner at Ottawa-based financial planning company Ryan Lamontagne Inc., says business owners are wondering if they need to be acting now to optimize the grandfathering rules. “Does that mean I must spend as much money as I can before Dec. 31 or the budget {}? If I go and borrow and spend?” Mr. Lamontagne asks, on behalf of his clients. He says a number of those strategies could leave business owners stretched financially. It may also delay investments in their busy company.

What does the $50,000 threshold comprise?

Does this include income on interest, dividends and capital gains — all which is taxed differently? The government says it is considering whether “in certain conditions, the rules should exclude capital gains realized on the sale of shares of a company engaged in an active business.” However, that leaves business owners scratching their heads. “$50,000 of what? Capital gains, dividends or interest? Nobody knows. They must get back to us on that,” says Jennifer Weeks, a Vancouver-based certified financial planner with Springtide North Wealth Advisory. She states that will ?affect how ?people?? are going to want to spend their money, “?so they are not double taxed.”

How will strength changes be treated under the grandfathering rules?

Ottawa says present passive investments will fall under the new rules, but what happens if you sell that advantage and purchase a new one under the new rules? Mr. Gorniak uses the example of a business owner that sells an apartment building purchased under the old rules to purchase GICs under the new rules. “Does it need to remain as the exact same asset?” he asks.

How will venture capital and angel investors be ?exempt from the changes?

Some investors argue that high tax rates on passive investments will mean less funds being reinvested in startups. Ottawa says it’ll make adjustments to passive investment principles to “maintain incentives” that will encourage venture capital and angel investors to invest in Canadian startups. Ottawa says it is going to work with the business to “identify how this can be accomplished.” The startup community is still waiting to find out what options are on the table.

“?We have excellent questions about how the regulations will be written, because our worries about the effects of the proposal on ?a?ngels that are making startup investments through private corporations haven’t yet been fully addressed?,” ?says Yuri Navarro?, executive director and CEO of ?National Angel Capital Organization?. He asserts that angel investing ought to be characterized as active investing, rather than passive. “Our objective is to work closely with the authorities on making certain the regulations are done in such a manner they don’t create additional obstacles to risk capital.”

While financial experts await the laws to be clarified, they’re warning clients not to make dramatic moves. While we might think we know what is coming, Mr. Lamontagne says, it is wise to wait before making conclusions. ? ? “Taking drastic action today might wind up hurting you.”

Courtesy: The Globe And Mail

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