IIAC’s president and CEO is urging the federal government to amend or drop the proposed tax changes for private corporations.

Earlier this week, Ian Russell testified before the House of Commons Standing Committee on Finance about Budget 2018 tax measures. He focused specifically on tax changes to passive investment income and refundability of taxes on investment income, and on the income splitting measure clarified late last year.

Taking a pass on passive income rules

Proposed is a reduction in the business limit for Canadian-controlled private corporations (CCPCs) that have passive investment income between $50,000 and $150,000 for tax years after 2018.

Specifically, a preferred corporate tax rate of 10% on the first $500,000 of qualifying active income (falling to 9% effective January 2019) will be phased out for CCPCs that exceed $50,000 of passive investment income in the taxation year. This will be achieved by reducing the amount of income eligible for the small business rate by $5 for every $1 of investment income that exceeds the $50,000 threshold. Businesses with more than $150,000 in passive investment income will pay the higher general corporate rate of 15% on active business income.

Russell says the rule unfairly penalizes small business owners by limiting holdings of passive investments to “meet unforeseen contingencies, purchase corporate assets for eventual corporate acquisition, or purchase of property to expand business operations.”

The proposal is also unfair, he says, because income earned from past investments isn’t grandfathered.

Further, changes to refundability will increase the administration burden for small businesses, says Russell, as they’ll be required to establish separate accounts for eligible and non-eligible dividends.

On the proposals, Russell is unequivocal: do not proceed.

Despite the government saying only 3% of private corporations will be affected, Russell says the potential effect on the economy is unknown, since these businesses “may be among the largest and most dynamic in the country.”

If the proposals do proceed (in the 2019 tax year), he suggests past investments be grandfathered, as well as income earned from such investments. He also suggests that the $50,000 and $150,000 exemption limits be indexed to inflation.

Read: Post-budget passive income strategies

Income splitting

Effective for 2o18 but with a year for clients to become compliant, tax on split income now applies to dividends paid to family members, except in certain cases. For example, to ascertain that family members made meaningful contributions to the business, they’ll be subject to a labour test (for service- or professional-based businesses).

Read: Feds clarify income sprinkling proposal

Russell suggests the feds consider further amendments to the rules to provide greater clarity, or at minimum delay implementation to give businesses more time to prepare and comply.

Read: What TOSI means for succession planning

Potential economic pains

Lastly, Russell urges the government to monitor the impact of its new rules.

“If the government proceeds with its modified new tax rules, we recommend it closely monitor the impact on expansion of existing, growing private corporations, and migration of these businesses to the United States,” he says. “Canada can ill afford the loss of available capital for small and mid-sized businesses.”

For full details, read Russell’s comments to the Standing Committee on Finance.