Summertime in Canada should be all about slowing down, spending time with family and enjoying warm summer nights at the lake. Unfortunately, both the Ontario government and federal government didn’t get the memo.
Instead, our lawmakers have decided to keep businesses on their toes this summer worrying about proposed major changes to Ontario’s minimum wage and federal tax rules. In this note, we highlight some of the key changes being proposed and why you should take note.
Ontario’s minimum wage
Ontario’s Bill 148 represents a major shakeup of the province’s labour laws. Currently under review by a standing committee in the legislature after a first reading in June, the bill proposes changes in many areas, including holiday pay, overtime, scheduling and emergency leave.
However, the bill’s headline change is a 32% increase in Ontario’s minimum wage, from $11.40 currently to $14 by 1 January 2018 and $15 by 1 January 2019.
The Keep Ontario Working Coalition (KOW) recently released findings from an economic impact analysis that it commissioned to assess the potential impact of Bill 148. The key findings include:
- A $23 billion hit to business over the next two years
- 185,000 Ontario jobs at risk over the next two years
Why it matters
In our view, the proposed implementation of the minimum wage hike is much too fast. Some businesses will have simply no chance to adapt in time. For businesses dependent on minimum wage workers, this change could be a death blow, potentially wiping out someone’s life’s work overnight.
Clearly, if your business has employees at or near the minimum wage level, then you may soon be paying considerably more to employ them. Even if your wage costs aren’t directly impacted, your overall business costs may be set to rise if your suppliers or service providers are forced to pay higher wages.
Federal tax rules
On 18 July, Finance Minister Bill Morneau announced the federal government’s plan for major changes to the Income Tax Act. The plan aims to close “loopholes” related to the use of private corporations for tax planning, addressing three key areas:
- Income sprinkling. Currently, business owners can use dividend payments from private corporations to split their income with family members in lower income tax brackets. The federal plan proposes to limit such income sprinkling by requiring that dividends be reasonable and paid only to individuals actively involved in the business.
- Holding passive investments in a private corporation. After paying the corporate tax rate, business owners can currently keep excess funds within their private corporations and use them for passive investments, deferring any personal income tax payable until they withdraw the funds from the corporation. The federal plan proposes to eliminate the tax advantages of doing this.
- Converting income into capital gains. Currently, business owners can use private corporations to convert business income into capital gains, which are taxed at lower personal income tax rates. The federal plan proposes to treat such capital gains as dividends from a tax perspective.
Why it matters
This is the single largest attack on small business in Canada in the past two decades. For years, owners of small businesses have been using private corporations for tax planning purposes, making use of the strategies described above to minimize their tax burden – fully in line with existing tax laws. To propose a major and rapid overhaul of these tax provisions will throw many business owners into turmoil.
These changes are of particular significance if you are currently sharing your business income among family members or planning to pass on ownership of your business to the next generation. While there are different risks depending on how you are using your private corporation to manage taxes, the end result of the government’s proposed plan is that you will end up with higher taxes and lower income.
So what can you do?
In the face of this turmoil, there are two things you can do.
First, make some noise. Both the provincial Bill 148 and the federal government’s tax plan are under review, so there is still time to write to your MPP and MP to voice your concerns and recommend changes.
Second, review your existing plans and make adjustments if needed. If passed into law, the new provincial and federal legislation will have major ramifications for businesses across Ontario and beyond. We can’t be certain yet of the exact changes that will be implemented, but you can start planning for the worst.
We’d much prefer you to be out at the cottage, sitting around the campfire with your family. However, if you feel the urgency to interrupt your summer to make sense of these proposed changes and develop plans for your business, we’re happy to help. Give us a call at 905-731-8977 or via email here firstname.lastname@example.org