This proposal is meant to crack down on people using sophisticated tax-planning techniques to convert income from private corporations into capital gains to get a lower tax rate. One way to do this is by selling shares in a business that have appreciated to a related company and then declaring the income made on the sale as a capital gain. This results in a lower tax bill than if the income had been paid out as a dividend.
Could new restrictions on the multiplication of the LCGE impact Family 1? It really depends on the value of their business. However, the reality is that many businesses with this low level of profit aren't saleable at all."Joe Blow's business may have assets and goodwill, but the goodwill is Joe Blow and without him the business really isn't worth much," says Mr. McShane.
There are already some rules in place which can make it more expensive to sell a business to a related party, but the proposed rules could increase the tax bill further. This is because a sale to a related party by a non-active shareholder who is related to the active shareholder could be taxed as a dividend at the highest possible tax rate, rather than a capital gain.
"We're looking closely at what those arguments are," said Mr. Morneau at a meeting with The Globe and Mail's editorial board on Sept. 27."And we're going to make sure we don't have consequences that aren't intended. Nothing about what we're doing was intended to make it more difficult for people to transfer assets between generations."
The Liberals say they want to rework the proposals to avoid impacts on intergenerational transfers, so it's not clear if these proposals will be enacted. In addition, there is not currently full agreement amongst tax professionals about the impacts of the proposals, which could be varied as there are numerous ways to structure intergenerational sales.
Family 2 and 3 might consider holding money inside the corporation, but they could also choose to put excess savings into their RRSPs."It's not a big deal for Family 3," says Andrew Zakharia, founder of AZ Accounting Firm."They could still do the RRSP route. Family 4 is the one who is crying." For example, business owners can currently tap money intended for personal use inside their company for business purposes if there's an unanticipated need for cash. Also, business owners are wondering how it would work if they were saving for a long-term project – for example, the down payment on a building.
globeinvestor Mr. Morneau has gorgotten that many small businesses struggle for years before they start making the large sums that he wants to now tax. Good way to convince new potential business owners not to buy. Struggle for years and then become successful so we can make you struggle more.
globeinvestor Pardon me, Sir..who are you?
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