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tax changes

Minister of Finance Bill Morneau responds to a question in the House of Commons, in Ottawa, on Nov. 30, 2017.Adrian Wyld/The Globe and Mail

The federal government will impose new restrictions on how small-business owners can divide income among family members as of Jan. 1, even though the promised details of the changes still haven't been released.

Anxious business owners are warning the lack of information will create big headaches in the new year.

Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), said the new rules could force companies to make complex revisions to their ownership structures.

"To expect them to make changes to all of that for a Jan. 1 implementation, with no detail whatsoever being shared, I find it appalling," said Mr. Kelly. "At minimum, they should be kicking this forward a year. To do anything other than that I think is going to just reignite the problem that they spent a lot of effort to put out."

The income-sprinkling provisions were part of a package of controversial changes first proposed by Finance Minister Bill Morneau in July. They are aimed at restricting the sprinkling – or splitting – of income with family members for the purposes of paying less tax, unless those family members have made a "reasonable" contribution to the business.

In October, the Minister announced several changes to the overall package in an effort to address the widespread controversy the changes had provoked among business leaders and tax professionals.

The October changes scrapped some of the original proposals, but maintained the plan to impose the income-sprinkling changes as of Jan. 1. An Oct. 17 Finance Canada news release said the government would release draft legislation on income sprinkling "later this fall."

However small-business owners are increasingly concerned that it is now December and the promised new details – including definitions of how the Canada Revenue Agency will define situations in which income sprinkling is allowed – have not been released.

Daniel Lauzon, a spokesperson for Mr. Morneau, said the details are coming and the changes are going ahead.

"Current income-sprinkling rules allow someone making $300,000 to save as much in taxes as the average Canadian earns in a year. We don't think that's fair, and we are going to fix it," Mr. Lauzon said in an e-mail Monday. He said the updated rules, including written guidance from the Canada Revenue Agency, will be released before they take effect on Jan. 1.

"The proposal will be fully legislated as part of the budget process," he said.

The CFIB is concerned that the government's plan effectively means it will be introducing legislation later in 2018 that will be retroactive to Jan. 1.

In announcing the October revisions to the tax package, Finance Canada said the vast majority of private corporations will not be affected by the income-sprinkling provisions. The department estimated that about 50,000 family-owned corporations benefit annually from income sprinkling, representing about 3 per cent of incorporated small businesses.

The October changes promised more detail of how Ottawa will administer a "reasonableness test" to determine whether or not income sprinkling will be allowed. The government said the test will be based on four criteria, including whether the family member made a labour contribution, a capital or equity contribution, took on financial risks such as by co-signing a loan or made past contributions to the business.

Members of the Senate's national finance committee have been touring the country, hearing witnesses on the proposed federal tax changes. The committee is expected to release a report later this month.

The committee's deputy chair, André Pratte, said Monday that senators heard a lot of concern from business owners about the Jan. 1 start and that he is personally of the view that the implementation date should be delayed.

"Many, many witnesses just asked for more time," said Mr. Pratte, an independent senator appointed by Prime Minister Justin Trudeau. "People should know what documents they will need and how they should arrange their affairs so they can meet those tests. So I think it would just be fair for the government to have a latter implementation date for those proposals."

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