The federal government’s Budget 2018 shows that Ottawa did respond to the voices of small business owners – including many physicians – when it came to revisions of the Canadian Controlled Private Corporation (CCPC). Was it a great outcome? No. But clearly some key things changed from the original direction government wanted to take, and your voices helped to make the difference.
Let’s review the situation. The Budget did introduce legislation with the goal of reducing the tax benefits associated with the build-up of passive investments inside private corporations. However, it did not introduce the complete overhaul of passive investment income as proposed in its July 2017 consultation paper. And that is a significant win. In the end, the outcome is not exactly what we’d hoped for, but not as bad as it could have been.
Looking back to July 2017, the government made three specific proposals. The first was to eliminate income sharing within a corporation, which they labeled “income sprinkling”. The second was to eliminate the ability of CPCCs to invest within the corporation and have the subsequent passive investment income taxed at the small business rate. The third was to eliminate the ability for CPCCs to utilize the capital gains exemption to transfer assets in certain circumstances. The implications of these measures ignited the small business community, including physicians in BC.
In fact, physician organizations were among the first to become really vocal about this because we have organizations such as Doctors of BC and the CMA able to mount a quick communications response. I will not dwell on the details of all the communications and subsequent political advocacy and activity.
What I do want to emphasize is that your individual advocacy efforts as members made a huge difference in the outcome. Without the eloquent and passionate efforts of physicians I do not believe the combined advocacy efforts of the wider Canadian small business community would have forced the degree of change we see in these proposals today.
So what changed?
The passive income proposal has changed significantly. The original proposal would have devastated physicians who use this tool to save for parental leave, unexpected illness, or retirement by eliminating your ability to use any investment in your corporation for anything not directly related to growing the business. The second iteration has a $50,000 limit on annual passive income before triggering the higher tax rate, whereas in the initial proposal there was no threshold at all. In this week’s budget, there is an incremental increase in the tax rate for each dollar over $50,000, maxing out at $150,000, which would then be subject to the general corporate tax rate. We would have liked a higher threshold to be established, but the government’s current proposal is better than the previous versions.
The other significant achievement is that these changes will take effect with the 2019 tax year. We had asked for the changes to be deferred as the initial proposal was to make them retroactive to July of 2017, and this was done.
The income sprinkling component was introduced as legislation in Fall 2017, and we did not achieve the changes we hoped to support our physicians.
Did we win this fight? Not completely. Did we change anything? Yes we did. Your engagement and advocacy has made a difference, and I thank you for stepping forward and getting involved. We also helped achieve changes for our patients who run small businesses and farms and this is a good thing.
Undoubtedly there will be long-term implications as to how we structure our businesses and how physicians are paid for the services they provide. We will continue to advocate on behalf of the membership as this situation evolves.