The Government of Canada has announced its intention to reduce the tax burden on small businesses and amend the forthcoming reforms in the field of tax planning. The innovations include the reduction in the tax rate for small businesses from 10.5% to 10% from January 1, 2018, and after January 1, 2019 – to 9%. According to the government forecasts, the reforms for the period up to 2022-2023 will save up to 2.9 billion Canadian dollars, which is equal to 2.3 billion US dollars). The previous conservative government in 2015 provided for the reduction in the tax rate for the next few years, down to 9% by 2019, however in 2016, these reforms were postponed.
It is assumed that after the introduction of changes, Canada will have the lowest tax rate on small enterprises among the G-7 countries. So, the application of a 9 percent tax rate on the federal small business will result in a decrease in the aggregate average provincial-territorial tax from 14.4 percent to 12.9 percent.
The current government will also take measures against using the status of Canadian Controlled Private Corporation (CCPC), in order to reduce the income tax obligations of employees with high wages. The government intends to prevent so-called “dispersion of income”, which is in transferring of a part of income by an employee with high wages (in the form of dividends) to the members of a family whose personal income is taxed at lower rates or exempt from taxation.
The main task in this case is to distinguish such “dispersion” from reasonable compensation to family members. The government will take certain measures for this: new rules will be introduced to “determine whether compensation is reasonable, based on the contribution of family members to the value of securities and other assets of private corporation”, and “reasonableness tests” including the opportunity for adult family members to prove their contribution to the enterprise.