Small business tax changes - Update

  • July 10, 2018

The Coalition for Small Business Tax Fairness, which the CBA joined last year, is continuing to lobby the government for more equitable taxation of passive investment income.

The budget implementation act was passed on June 21, 2018. The tax changes for passive income will come into effect for taxation years after 2018.

The 2018 federal budget responded to some of the concerns the Association and the Coalition had made over changes made to small business taxation announced last summer. But in a May 25 letter the Coalition expresses its concern over a change to existing passive investments rules, despite a government promise to grandfather those passive investments. The Coalition recommends measures to alleviate the burden of new passive income rules on businesses.

 “(D)espite your government’s promise that passive investments currently held by small businesses would be grandfathered under the new rules, we are deeply concerned that existing passive investments will be used as a measure to determine whether they qualify for the small business deduction on their active business income starting in 2019,” the Coalition says in the letter to Finance Minister Bill Morneau. “In the event that passive investment income surpasses the $150,000 mark in a year, businesses will completely lose access to the small business deduction, significantly increasing their overall tax burden.”

As well as reiterating earlier recommendations with a broader-scale application, the Coalition makes a number of new recommendations to address the changes on passive investments, including:

  • Not proceeding with the proposed passive investment rules
  • Working with tax professionals to ensure existing investments aren’t included in the formula for determining eligibility for the small business deduction
  • Implementing a more gradual “grind” in eliminating the benefit of the small business tax rate
  • Raising the threshold where passive investment income begins to affect a firm’s access to the small business deduction from $50,000 to $100,000
  • Indexing the $50,000 and $100,000 limits to inflation