The 2018 federal budget, introduced on Feb. 27, allays some
concerns small-business owners had over last year's controversial proposals. It
also includes some encouraging initiatives relevant to lawyers.
Last summer, the federal government suggested that, among
other proposals, it would eliminate tax-deferral advantages on passive income
earned in a private corporation. The government has refined its position by
proposing to erode the small-business deduction for any passive income over
Before the recent budget, small businesses benefited from a
low tax rate on the first $500,000 of active business income. Starting in 2019,
this $500,000 limit will be reduced by $5 for every $1 of passive income over
$50,000. This means that passive income of $150,000 will completely eliminate
the small-business deduction.
This is a more steamlined and balanced approach in
comparison to what was proposed last year. There is no change to the taxation
of passive income. Rather, business owners now need to monitor the reduction in
the small-business deduction if passive income is greater than $50,000.
For younger lawyers, the impact of this change may be
abstract. However, for older lawyers who have saved within their professional
corporation for retirement, emergencies or extended leaves, that type of
passive income may be a reality. With the proposed changes, lawyers may need to
rethink the allocation of savings in their corporation.
The intent of the tax system is that investment income
earned in the private corporation is taxed at a higher rate. When the
corporation pays this income to shareholders, it claims a refund of a portion
of that tax. The problem, however, is that corporations may pay dividends out
of active business income (taxed at a lower rate) and still claim the refund.
This can result in a significant tax advantage, particularly for larger
To curb this practice, the government proposes to make
refunds available only for payments to shareholders sourced from investment
income. Dividends sourced from active business income taxed at the general
corporate rate will not attract the refund. This will require business owners
to track investment income and active business income separately.
Support for women-led
The federal budget supports women-led businesses by way of
$1.4 billion over three years in financing for women entrepreneurs through the
Business Development Bank of Canada. Further, the government will increase
funding to $200 million in the BDC's Women in Technology Fund. These are in
addition to other initiatives such as financial support to Status of Women
Canada, changes to parental leave to allow women to return to work earlier and
other initiatives to eliminate inequalities in the workforce. While these
initiatives are encouraging, they may not go far enough to address practical
issues faced by self-employed women, such as funding maternity leave.
Supporting access to justice
The federal government proposes to inject funds to
strengthen the judiciary, support the court system and enhance openness and
transparency. Some notable highlights in the proposals include:
million over four years to support the expansion of Unified Family Courts and
the creation of 39 new judicial positions in Alberta, Ontario, Nova Scotia and
Newfoundland and Labrador;
million over five years to the federal courts;
million over five years for six new judicial positions in Ontario and one
position in the Saskatchewan Court of Appeal;
million over two years to maintain support for the judicial discipline process
via the Canadian Judicial Council and the Office of the Commissioner for
Federal Judicial Affairs;
million in 2018-19 to increase the capacity of the Office of the Information Commissioner
to handle complaints over access-to-information requests;
million to fund the Access to Justice in Both Official Languages Support Fund.
While the funding to the judicial system is welcome, the
provinces will likely also need to increase funding to meet the needs of the
As the budget demonstrates, the government has listened to
the concerns of the small-business community. Many sole and small-firm lawyers
contributed to the opposition to last year’s proposals. While many of the new
proposals are a step in the right direction, lawyers and business owners will
still need to recalibrate their long-term planning to operate smartly within
the changing tax regime.