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CMB MAGAZINE cmba-achc.ca summer 2018 | 29 smallbusinessntax business deduction (SBD) on their active business income starting in 2019. In the event that passive investment income surpasses the $150,000 mark in a year, businesses will completely lose access to the SBD, significantly increasing their overall tax burden. We believe this is unfair to those who have followed the rules and made prudent and appropriate business decisions to create a capital reserve within their business. Since the early stages of these proposals, business owners were told repeatedly by your government that their existing passive investments would be unaffected, and these new rules would only apply on a go-forward basis. As these investments will now affect a firm's tax bill on its active income, this effectively ends any grandfathering protection. We urge you to stand by the spirit of your commitment. As the Budget Implementation Act is currently making its way through the House, time is quickly running out. We therefore encourage your government to act immediately, to ensure that there are no unintended negative consequences on the small business community. e Coalition has worked closely with tax and accounting professionals on suggested approaches to permit greater grandfathering under the new rules and/or to decrease the burden on business owners as a result. We would recommend the government consider the following approaches to address this: n Do not proceed with the proposed passive investment rules. n If determined to proceed, work with the Coalition and tax professionals to ensure that existing passive investments are not included in the formula in determining eligibility for the small business deduction going forward. We are committed to working with you to develop a way to grandfather past passive investments without adding significant new complexities to the system. n Implement a more gradual "grind" in eliminating the benefit of the small business tax rate. For example, adjust the grind over $50,000 of passive income to $2.5 per $1 of passive income (rather than $5 per $1 of passive income). is would mean that the Small Business Deduction is not ground down to nil until passive investment income reaches $250,000. n Raise the threshold where passive investment income begins to affect a firm's access to the small business rate from $50,000 to $100,000 to exempt more small firms. n Index the $50,000 and $150,000 exemption limits to inflation to prevent small businesses from being subject to bracket creep on the taxation of their passive investment income in future years. As noted, we are committed to working with the Department of Finance to find solutions to help address our concerns without creating significant new complexities for government or business taxpayers. In addition to our concerns regarding passive investment rules, the small business community remains distressed by, and unprepared for, the new rules on income splitting. is issue has not gone away and we believe it is critical that your government consider amendments to income splitting rules such as delaying its effective implementation to January 1, 2019. We would like to reiterate our earlier recommendations: 1 Immediately undertake an economic impact assessment of the package of proposed changes and delay implementing any tax changes until this assessment is complete. 2 On income splitting: l Postpone the application of the changes until, at the very earliest, Jan. 1, 2019. l Consider, at a minimum, a full exemption for spouses from the new income splitting rules. 3 Undertake a comprehensive review of Canada's income tax system with a view to reducing complexity, thereby helping small business owners to better understand tax implications before making critical business decisions. We remain committed to working with you. Please do not hesitate to reach out to any of the undersigned groups and associations should you have any questions or comments about the contents of this letter. In the event that passive investment income surpasses $150,000 in a year, businesses will lose access to the small business deduction. Patrick Doyle/Canadian Press

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