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Greig: Federal tax backtracks aside, much of impact still unknown

The Canadian Association of Farm Advisors’ annual tax update showcased confusion and frustration at the federal government’s shifting plan to change how small business is taxed.

“I was very, very offended by all of this,” said Kurt Oelschlagel, of BDO Canada, who was part of a panel on the government changes at the CAFA event, held Thursday in Guelph and online.

Many of the slides in his presentation were made redundant, as Finance Minister Bill Morneau backtracked Thursday on yet another part of the changes.

The Liberal government’s proposed changes to small business corporations were initially aimed at high-income earners who have created personal corporations to manage their incomes to pay taxes at the lower corporate tax rate.

However, when accountants started examining the potential changes, they were much further reaching and complex than expected. They included changes to capital gains tax, tests that determine whether dividends distributed are to people who have contributed to the business and punitive tax rates on savings made within a corporation.

This week, Morneau has backtracked on two of those proposals, including capital gains. The government will now allow up to $50,000 per year to be saved in passive investments in corporations. He says that means that only five per cent of small business corporations will be affected by the higher passive investment return taxation levels.

At the Thursday event, the organizers played Morneau’s latest backtrack on the policy live, as he stood at an Erinsville, Ont. farm and talked about delaying the implementation of the capital gains changes.

That means most of the day’s presenters had to change their presentations after that announcement and the announcement on passive investment earlier in the week.

Justin To, director of policy and budget director for the minister of finance, was slated to speak to the meeting, but he backed out, citing the announcements by the government of changes to the tax proposals and especially the fact Morneau was making an announcement the same day.

“We live in a representative democracy and it looks like politics is coming into play,” said Stephen Sweeney, a Waterloo, Ont.-based partner at Miller Thomson LLP, a law firm that works with agriculture clients.

Sweeney said it will take 10 years to sort out all the implications of such significant tax changes and instead he suggested that time be taken to do thorough and well-thought-out tax reform, adding that the modern version of the Income Tax Act came into force in 1972.

“More complexity in the tax system means more creativity for tax advisors,” he says. “I’m not sure if it is good that tax advisors prosper by uncertainly felt by ordinary Canadians.”

Farmers were warned their accounting bills would rise due to the increased complexity and on-and-off changes.

One of the significant changes made by the government is in how it will measure who has meaningfully contributed to the business and therefore deserves remuneration in the form of dividends.

John Mill, a Guelph lawyer who works with farmers and farm advisors on tax reorganization, told the meeting that “family members who meaningfully contribute will not be impacted,” but that there will be little legal flexibility if family members are paid without contributing.

If there hasn’t been a meaningful contribution, then the money will be added to “split income” and taxed at a higher level.

He has concerns about how the amount that’s reasonable to be paid for work will be decided. Would it be possible for the revenue ministry to find someone who would do the work at minimum wage? Then anything above the hours worked at minimum wage rate could be taxed at a much higher rate.

The test for “reasonableness” will take in functions like assets contributed, risks assumed and prior compensation. Documenting hours could become necessary, which is a challenge when farmers live at their work and are on call all the time.

“The CRA is missing the point that farmers grow up in the family business. We train farmers in the family business and on family farms.

“Eight hundred million dollars per year (the total of the revenue increase of the new policy) is idiotic with the enormous societal cost of these idiotic policies,” Mill said.

The question has arisen relating to the payment of children of farmers who farm under a corporate structure.

Sweeney said the new “reasonableness” test will likely drive businesses from paying them through income sprinkling and to making them actual salaried employees of the farm.

Scott Ross, director of business risk management and farm policy with the Canadian Federation of Agriculture, said moving family members to employees, if they deserve to be paid, is one of the main goals of the government.

They want to drive activity away from dividend sprinkling and back to salaries, he says.
There was relief at the meeting that some of the most problematic provisions of the Liberal proposals were off the table, but also anger at the time wasted.

“How much non-billable time have we spent on this since it came out?” asked Oeschlagel, adding that many meetings were held with clients to prepare them for potential quick changes to their business organizations by the end of the year.

There remain a lot of unknowns — which will still mean a lot of work ahead for accountants, advisors and incorporated farms.

— John Greig is a field editor for Glacier FarmMedia based at Ailsa Craig, Ont. Follow him at @jgreig on Twitter.

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