CFIB calls new income sprinkling rules “a lump of coal for small business”

By The IJ Staff | December 14 2017 11:30AM

The Canadian Federation of Independent Business (CFIB) has expressed its disappointment with the federal government's release of new income sprinkling rules for private corporations.

On Dec. 13, the federal government published details of its proposals “to simplify and improve the treatment of income sprinkling.” It says the revised measures are “designed to ensure that they do not affect family members who make meaningful contributions to a family business.”

The changes include "bright-line" tests to exclude family members who fall into certain categories from potentially being taxed at the highest marginal tax rate. Among these categories are business owner's spouses, aged 65 or over, and adults aged 18 or over who have made a substantial labour contribution.

 “Opposite of tax fairness”

The CFIB says that while it recognizes that the government “has attempted improvements” by excluding some family businesses from the new rules, it remains highly concerned and reiterated its call to delay implementation of the new tax measures 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," stated Dan Kelly, CFIB president, in a Dec. 13 announcement. "How our government expects small businesses to understand the new rules and make any needed changes to their corporate structures in two and a half weeks is beyond me."

Informal participation

"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 added. "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.

The Canadian Medical Association also says it is disappointed that the government is moving ahead with the income sprinkling measures.  

Senate report

The CFIB and the CMA both underlined a newly released report by the Standing Senate Committee on National Finance, which has called for the proposed changes to be withdrawn and a comprehensive review of the overall tax system to be undertaken.

The CMA says it remains “very concerned with the unintended consequences of the tax changes – the most significant in 45 years.”

Recommends a full exemption

The association recommends a full exemption for spousal income and dividends for the new income sprinkling rules, recognizing that spouses/partners are integral to the risk and development of a business enterprise, including a medical practice.