Federal government’s changes to the Income Tax Act face continued criticism

Finance Bill Morneau clarified some of the new changes to the Income Tax Act last week - but those answers prompted even more questions.
Finance Bill Morneau clarified some of the new changes to the Income Tax Act last week - but those answers prompted even more questions. Sean Kilpatrick/CP

As more information is revealed about the federal government’s changes to the Income Tax Act, more criticism and questions are springing up.

This time, the Canadian Federation of Independent Business is weighing in.

As recently as Friday, Finance Minister Bill Morneau continued to clarify the changes to the rules, specifically regarding “income sprinkling.”

The term refers to Canadian-owned private businesses dividing profits among employed family members who may be taxed at a lower rate.

Changes will require businesses to prove to the Canada Revenue Agency that the family members being used to “sprinkle” make meaningful contributions to the business.

While last week there was some clarification on just how the CRA would go about evaluating the legitimacy of the sprinkling, there are still concerns about the changes.

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READ MORE: What you need to know about Morneau’s changes to ‘income sprinkling’ rules

On the Alberta Morning News, vice president of National Affairs for the CFIB, Corinne Pohlmann, explained that simply implementing the changes is going to be extremely challenging.

“We do think that these new rules are likely going to add quite a significant amount of red tape to many small business owners who employ family members, or have investors that are family members,” she said.

“The worst part of it is — this all comes into effect on Jan. 1… so it’s not leaving a lot of time for people to adjust to the new rules.”

The CRA is also having some concerns about just how it is going to work through which businesses are qualified for income sprinkling. The federal court chief justice and others have been vocal about their apprehension about the changes.

“They’re expecting there’s going to be a lot of challenges to these rules and they don’t see it as being a very productive use of their time either,” Pohlmann explained. “It’s quite unprecedented – both the current chief justice and the previous chief justice both spoke out about it.”

However, the federal government does seem to be responding to some of the criticisms the plan has faced since the changes were proposed last summer.

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One update announced last week was that the new rules will not apply to income sprinkling to the spouse of business owners over the age of 65 — essentially, they will be operating under the old guidelines.

According to Pohlmann, this is fair because, for most senior business owners, the profits from their business operate as their retirement fund or pension.

“Every other pensioner gets to split their income with their spouse, so at least they did move forward with that,” she said. “So they are able to basically split that income as you would a pension income with a spouse, so that’s good news.”

READ MORE: Small business tax changes: Liberals scale back passive income rules

According to the federal government, the changes to the income tax act will only affect a small amount of businesses — it estimates about 45,000 small businesses in all of Canada will have to incorporate changes to the way their income is taxed.

But according to Pohlmann, not having to change the way profits are taxed is not the same as a business being unaffected by the move.

“At the actual end of the day, only three per cent may end up paying extra tax on this income that they share with family members,” she said.

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“I think a lot more are going to have to deal with the paperwork to prove that they’re actually employing these people in a meaningful way in their business.”

According to research by the CFIB, around 70 per cent of Canadian-owned private corporations employ or are invested in by family members.

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