New Canadian Tax Legislation Could Be Hugely Damaging to Small Businesses

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A set of proposed tax code changes in Canada could potentially have a negative impact on small businesses north of the border. And even though U.S. businesses might not see any immediate impact due to these changes, the impact on partners, clients and others in Canada could eventually make a difference to U.S. businesses as well.

The legislation, according to Canadian Prime Minister Justin Trudeau, is meant to help the middle class and inject more fairness into the country’s tax structure by closing loopholes used by wealthy business owners. But a growing number of small business owners, even those who could be considered middle class, are voicing their disapproval of the changes.

Proposed Small Business Tax Changes in Canada

There are three potential changes included in the proposed legislation. The first would end a practice that allows small business owners to sprinkle income to their family members in lower tax brackets in order to receive a lower tax rate. Currently, those family members don’t even need to be active in the business in order for business owners to use this strategy.

The next proposal would place limits on the use of private corporations to gain tax advantages when making passive investments in things like stocks or real estate. And the third would limit the ability of corporations to transfer regular income into capital gains, which are usually taxed at a lower rate.

Opponents argue that these loopholes are meant to offset and recognize some of the risks small business owners face, like using their homes as collateral for business capital and not having access to unemployment insurance. The government is holding a consultation on the proposed reforms from now until October 2.

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