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taxcoalition CMB MAGAZINE cmba-achc.ca winter 2018 | 19 The proposals provide an exclusion for amounts earned by an individual (over the age of 17), in respect of a property, where the amounts are derived directly or indirectly from an "excluded business." To qualify for this exclusion, the individual must be actively engaged on a regular, continuous and substantial basis in the activities of this business, either in the current year or in any five prior years. To assist in determining whether this exclusion applies, a bright-line test has been proposed, whereby an individual is considered to be actively engaged in the business if they work at least an average of 20 hours per week in the business during the portion of the year in which the business operates. This will address situations where an individual is not currently working in the business, but did so previously on a basis that meets the bright-line test. However, there is a significant concern about how to prove sufficient hours were worked in the five prior years – in particular, if these five prior years took place a number of years ago. The CRA's guidance indicates that records such as timesheets, logbooks, schedules and payroll records will be sufficient to establish the number of hours. However, in many family run businesses, family members will not record specific hours worked. Or, if they did have such records, they may not have retained them if it was a number of years ago. As a result, providing records to satisfy this test could be a very onerous or even an impossible task for taxpayers, raising concerns of whether they can rely on this exclusion in situations where TOSI should not apply. The proposals provide an alternate exclusion for an amount included in the income of an individual (over the age of 24), in respect of a property, where the amount is income from, or a taxable capital gain from the disposition of, "excluded shares." One condition that must be met for shares of a corporation to qualify as excluded shares is that less than 90 per cent of the business income of the corporation was from the provision of services. Concerns have been raised as to why service companies have been targeted so broadly in the definition of excluded shares. There appears to be an inequity as to why a manufacturing business would likely meet this particular condition, while a business providing housecleaning services or IT consulting services would not? In addition, many businesses may be providing a combination of products and services. Therefore, in order to meet this condition, additional compliance for businesses would be needed in terms of keeping records to distinguish what income is and is not from the provision of services. In fact, this will likely also require a subjective analysis of the business income of the corporation, which introduces uncertainty into applying the tax rules appropriately. Examples provided by: BDO Canada While it was implied that the process will be simplified and more targeted, the exemptions do not achieve this goal. e Coalition recommends that the federal government postpone the implementation of the changes until, at the very earliest, January 1, 2019. As the burden of proof and compliance remains with the business owner, the delay would help ensure that the business community is fully aware and provided with sufficient time to implement required fixes to existing business structures, if needed. In addition, given the key role spouses (including common-law partners) oen have in a business that cannot always be easily quantified, we also recommend that the federal government provide all spouses with a full exemption from the new income splitting rules. Hit Pause on Passive Investment Rules We understand that proposed legislation on passive investments is to be brought forward as part of the 2018 federal budget. As noted in previous correspondence, while we are pleased that the federal government now recognizes the importance of permitting some passive investment (and resulting income) within a private corporation, we believe the proposed $50,000 annual passive investment income limit will be inadequate for many – particularly for those businesses saving for larger investments, innovations or expansion. As the government wishes to see a greater number of small and medium businesses scale up, these new rules could severely limit the ability of small businesses to save for large investments (such as a new building or piece of equipment) that could improve productivity or allow them to grow. Furthermore, we believe most small businesses will continue to be saddled with additional complexity and compliance costs despite the proposed $50,000 threshold for passive investment income. While the details of the changes are not yet known, it is our understanding that there will be several scenarios where the business would pay punitive levels of taxation (including some with rates higher than 70 per cent) as well having to take on onerous tracking and reporting obligations that will require the assistance of tax professionals. We would like to bring forward the examples in [the Income Splitting appendix, opposite] to help illustrate some of the potential unintended consequences of the upcoming changes to passive investment rules, as we currently understand them. We therefore recommend that the government drop the passive investment rules until a full economic impact assessment has been completed and an approach has been developed that will ensure there are no unintended consequences. Conclusion and Recommendations Given the complexity of these proposals, more analysis and consultation is needed to fully understand the effect on the small business community. We are committed to working with the government to continue to find solutions that don't negatively affect the small business community's ability to grow and prosper. We therefore recommend you: 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: . Postpone the application of the changes until, at the very earliest, January 1, 2019. . Consider, at a minimum, a full exemption for spousal income and dividends from the new income splitting rules. 3. On passive investment: . Do not proceed with the proposed passive investment rules. 4. Undertake a comprehensive review of Canada's income tax system. As further evidence supporting our recommendations, we offer the recent report of the Senate Finance Committee, made up of senators of all parties, including recently appointed independent members. 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. We remain committed to working with you. We stand ready to work with the government on finding solutions to ensure that intergenerational transfers of small businesses are easier and less costly, while, at the same time, maintaining the integrity of the tax system.

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