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The Proposed Changes
Federal Finance Minister Bill Morneau unveiled a proposal the government believes will close the following "loopholes" in the federal tax system that they say disproportionately benefit wealthy Canadians:
- Sprinkling income using private corporations - a corporation "paying" family members who are subject to lower personal tax rates.
- Holding a passive investment portfolio inside a private corporation - corporate income tax rates, which are generally much lower than personal rates, facilitate the accumulation of earnings that can be invested in a passive portfolio.
- Converting a private corporation's regular income into capital gains - income is normally paid out of a private corporation in the form of salary or dividends to the principals, who are taxed at the recipient's personal income tax rate. In contrast, only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains.
The Issue
Franchised small businesses, much like other small businesses throughout Canada, rely on family members who often contribute in many ways making it difficult to determine a 'fair compensation' threshold compared to an hourly paid employee.
Further, franchised business owners put their own capital and equity into a business assuming 100% of the risk to secure the future of their families with few government support systems available to them after their working years. Particularly for franchisees, the revenue that they generate within their corporation is often maintained in the existing business or used for expansion for the longer term, all of which creates jobs that support the Canadian economy.
CFA believes the changes being proposed by the Minister will hurt Canadian franchisees who currently use these legal avenues to create jobs and support the communities they serve.
CALL TO ACTION: EMAIL YOUR MEMBER OF PARLIAMENT
CFA has developed a letter for franchisees from across Canada to send to their local Member of Parliament (MP).
Please distribute this email to your franchisee network and ensure the voice of the franchise sector is heard.
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