How Will The Changes To Income sprinkling Impact You

As soon as the government started talking about tax reforms for corporations who used income sprinkling as a tax saving strategy small business owners across Canada started to worry about the implications these impending changes would have on them.

Before we dive in and give you the full ins and outs of this tax law change, who it impacts, and what it means for small business owners we want to start by saying that majority of our small business clients will not be impacted by these changes. Those impacted the most are high-income earning professionals, such as Doctors and Lawyers, who have been income splitting with a spouse who is not actively working in their business.

What is income sprinkling?

Income sprinkling aka income splitting is a tax strategy commonly used by higher-income business owners or incorporated professionals to help them personally access more funds from their corporation without the high tax bill. To implement this strategy the corporation pays out company dividends to a lower earning family member of the business owner or incorporated professional, in most cases a spouse or child.  The family member receiving the funds is taxed at their tax rate, which is lower than the higher income earners tax rate.

 

The existing law

The original law around income sprinkling/splitting was the Tax on Split Income (TOSI) rule which applied the highest marginal tax rate to income that was split with a family member under the age of 18. Commonly known as the “Kiddie Tax” this law had not been extended to family members 18 or over.

The New Law

You can probably already see the writing on the wall and if you assumed the new law extends the principles of the “Kiddie Tax” to all family members 18 and over who receive dividend payments from the corporation without actually being an active member of the business, you would be correct.

Exclusions

It should be noted that there are some exceptions to the rule:

  • It doesn’t apply to salaries paid to family members.
  • If you are income splitting with your spouse and you are aged 65 years and over you are exempt.
  • If your family member works consistently in the business 20+ hours per week during its operations within the tax year or can show that they have consistently worked within the business over the past 5 years they will be exempt.
  • If you are 25 or over and you hold Excluded Shares in the corporation and the corporation is not a professional corporation or a business that provides services.

What it means for you

For a majority of small business owners, these changes don’t pose a significant impact. So long as your family member is actively working within the business and can provide documentation to prove that fact the high tax bracket won’t be applied.

For a lot of incorporated professionals that have been income splitting with a spouse who does not actively work in the business these changes will have a significant impact on their tax saving strategy.

3 Ways To Survive A Minimum Wage Increases

The current minimum wage in BC as of June 1st, 2018 is $12.65 and that number is expected to rise steadily in the coming years. As small business owners in one of Canada’s most expensive cities, it should be no surprise that minimum wages are increasing. Many small business owners are already paying well above minimum wage to align with the cities livable wage of $20.91/hour and retain good talent.

Minimum wage increases are often met with mixed reviews from business owners. While some feel it will fuel the economy as employees will have more money to spend and create happier workplaces, others feel it will have a crippling impact on small business owners and their bottom line.

No matter what your point of view is on minimum wage increases the fact of the matter is – they are coming whether you like them or not. Here are 3 ways that you can make sure you are prepared for the increase.

 

 

1. Streamline Your Business

Inefficiencies, products and services with low-profit margins, and outdated systems tend to stick around longer than they should when a business is thriving. When a minimum wage increase hits and payroll taxes and accounting fees go up the reactionary approach for a lot of business owners is to start thinking about employee cuts because at face value higher wages appear to be the problem.

Rather than hastily cutting staff or treating your employees differently now that they cost more we recommend turning your focus on your business and getting real with yourself. Ask yourself when was the last time you shopped around to ensure your insurance policy, bank account fees etc. were the best price? What parts of your business could be automated with the right technology? Which product or service lines have small margins and should be cut? What systems can be upgraded?

Doing a thorough audit of your business, reviewing your profit margins and investing in better systems can save you thousands long term. Helping you stay on budget when minimum wage increases are announced.

2. Reduce Your Hours

It’s not always ideal but it is better than laying off good staff. If you have a storefront or provide services a lot of overhead can be reduced if you are smart about your operating hours and your scheduling. If your sales are low on a Tuesday and only barely cover your operating costs then maybe there is no need to be open that day. Or if you notice that most of the work is completed from 9am – 3pm and from 3pm – 5pm nothing gets done, reduce your teams daily hours to 9am – 3pm until you can ramp back up.

While reduced hours isn’t ideal for your existing staff it’s much better than no hours.

3. Increase Prices

While this isn’t always ideal it’s a very viable option to manage a minimum wage increase. With inflation prices can’t be expected to stay the same forever and when minimum wages increase it’s common for the cost of goods to increase with them. Talk to your bookkeeper to determine what the deficit is with the wage increase then look at how you can recoup that with incremental price increases across your products or services. So long as you continue to ensure your level of service remains high most customers will stay loyal.

A lot of small business owners in Vancouver are already paying above minimum wage to ensure they can retain talent so when wage increases are implemented the impact is minimal. If you happen to find yourself in a tight situation when the next increase is announced talk to your bookkeeper or accountant and look for ways to trim the fat from your business that are win/win for both you and your employees.

The Pros and Cons of Speculation Tax

Unless you have been living under a rock we assume you’ve heard the speculation about Speculation Tax (see what we did there). The speculation tax is designed to help make the housing market of urban areas more affordable and available by encouraging homeowners to rent out their homes and not leave them vacant. The areas affected include Metro Vancouver, the Capital Regional District (excluding the Gulf islands and the Strait of Juan de Fuca), Kelowna, West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack and Mission.

Who this affects

The speculation tax while seemingly terrifying, because, you know it’s potentially going to mean you pay MORE TAX will actually only impact 1% of residents and homeowners with BC properties.

The types of homeowners that will be impacted are:

(https://workingforyou.gov.bc.ca/speculationtax/)

  1.     If you are a resident of BC who owns a home but you aren’t living in it you will be taxed 0.5% of the value of your home unless your home is worth less than $400,000.
  2.   Out of province homeowners who own a home in BC that they don’t live in or rent out for at least 6 months of the year will be taxed 1% of the value of the home.
  3.   Foreign owners who don’t pay taxes to BC and who don’t reside in the home or rent it out for a minimum of 6 months out of the year will be taxed at 2%.

The 3 types of people who fall into the speculation tax bracket will have to pay the tax, rent their home out, sell or simply move in full time.

Who is safe?

Approximately 99% of people not affected by this new tax. If you own a home and live there all year, if you rent your home for at least 6 months of the year, if you don’t even own a home and are renting or if you own a home outside if the areas that were mentioned above, this new tax won’t impact you. Additionally, if the following apply to you then you are exempt – you are in the hospital or going through medical care, if you are temporarily away from home because of work, if you are in long-term care or in a supportive care facility or if the homeowner is deceased.

Pros

The Speculation Tax is aiming to improve livability in popular BC areas by encouraging homeowners to rent out their properties creating more access to housing which is a really BIG positive.

There are also a lot of measures in place to help make the tax more bearable. If you are a BC resident you will be eligible for a tax credit, the maximum amount for this is $2000, and $2000 isn’t something to scoff at. If you own 2 homes the Speculation Tax will only be applied to one of your homes, which is also a bonus. The tax itself is also so easily avoidable if you just rent out your second home or even sell (which is extreme but an option nonetheless). You can also completely avoid the tax if your home is valued at less than $400,000.

Cons

Even though there are exemptions in place to protect residents these exemptions take 3 months to be approved so this can be a real set back for some people. There is also a lot of chatter about the tax impacting the value of recreational homes in the areas where it is enforced, which could have a negative impact on tourism.

Some people have been petitioning against the Tax due to all of these cons, which is really not helping the Tax move along smoothly. It’s almost like a tightrope walk at this point, no one really knows what’s going to happen in the future as so many people are all for the tax and so many are completely against it. While the tax has been approved and implemented who knows how long it will remain in place.