What will federal tax changes mean for real estate investors and businesses?

Proposed new small-business tax rules penalize those entrepreneurs whose hard work is the backbone of Canada, says senior property advisor Neil Hamilton

Macdonald Realty
October 16, 2017



Boy, oh boy, oh boy, has the poop ever hit the proverbial propeller in the wake of the feds’ announced proposed CCPC (Canadian-Controlled Private Corporation) tax changes.

Most of the fallout is negative, with a smaller proportion of the commentary opining that it will actually help small corporations. Tough to know which it will be until the axe finally falls, and how big the blade is. Will Trudeau, Morneau et al stick to their leftist guns and implement their new “socially levelling” tax legislation pretty much unchanged? Or, in the face of some rather withering attacks from groups such as incorporated doctors, will they water it down somewhat? If they do not, will we experience a “doctor brain drain” (again) to places such as the US?

In this space, we’re not as concerned for doctors as we are for smaller landlords and PREC (Personal Real Estate Corporation) realtors. Because this legislation, especially if passed intact, will hit those people every bit as hard as incorporated doctors and other self-employed professionals.

The federal Finance Minister Bill Morneau comfirmed on October 16 plans to cut the small business tax rate from 10.5 per cent to 10 per cent by January 1, 2018, and to 9 per cent by January 1, 2019.
As well, the government says it will not be moving ahead with previously proposed changes to access to the lifetime capital gains exemption, which had been met with backlash from many small business owners, particularly farmers. Morneau also said the government intends to simplify proposed changes to limits to business owners splitting income with their family members. Still, until changes to income splitting are clarified, the move continues to draw criticism. 

What is the legislation for?

This legislation is supposedly meant to:

a) curtail illegitimate “income sprinkling” within families, where the primary, highly-taxed income earner can transfer a portion of his/her income to spouses and children at a much lower tax rate, thereby lowering their own personal tax rate; and

b) tax “passive investment income” kept within a CCPC at the same rate that a salaried individual would pay.

The rub here is that business owners often experience ups and downs in their businesses throughout the year and in the “down” periods must set funds aside for a “rainy day”. The question is, can (and should) we really equate a salaried person with a secure job and a paycheque he or she can count on every monthwith very little risk-taking involved to an entrepreneur who has an idea for a business, the desire and guts to make it work and maybe to leave to his/her kids and the uncertainty that he/she will make it through the next quarter?

Iain Black, CEO of the Greater Vancouver Board of Trade, states, “The proposed changes will have far-reaching implications on every man and woman who is either currently running a small business, and employing between five and 20 people, or somebody who is contemplating the same thing.”

The effect on smaller landlords

Take smaller landlords for instance. There are many family CPCCs that own and operate a small stable of investment properties in cities and towns across Canada (commercial and/or residential). In many of these companies, for example, one spouse may be the principal person who runs the business day-to-day but the other may do the books, with their adult children helping with maintenance and other tasks – plus they may be being groomed to take over the business in the future. The company pays the principal manager a certain higher amount, on which they pay tax at their personal rate, and the other spouse and kids pay at their rates based on what they earn.

If this landlord is like many smaller building owners, both here in Vancouver and places like Toronto, Saskatoon, Quebec City or Halifax, they likely sweated and toiled and put everything on the line with many sleepless nights to purchase their first property, then put some more on the line to get his second one. The family probably improved the property themselves, cleaned it themselves after hours and met with demanding bankers a number of times each year to keep the cash flow in the black. And now the government is saying that basically that they should effectively be penalized by the tax system for having taken those risks to get ahead in life. That they should have taken a secure job and been satisfied with their lot in life.  

A substantial number of Canadians disagree with the concept of “treating everyone the same”. People are not the same. Those that want to work harder than others to get ahead and not simply vegetate in front of a TV every night should be allowed (or even incentivized?) to reap the rewards of that hard work.

Canada is a country built on the backs of small businesspeople. They are the ones who do the work and take the risks, and they are the ones who need and should receive the advantages and economic protection of a CPCC. 

- with files from Emma Crawford Hampel, Business in Vancouer 

J. Neil Hamilton is a Senior Property Advisor with Macdonald Realty Ltd. with expertise in the buying, selling and leasing of both residential and commercial properties throughout the GVA. He can be reached at 604-499-7240 or neilhamilton@macrealty.com.
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