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December 31, 2015

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Small Business Is Under Attack!

Remember those classic science fiction movies from the 1950s and 60s, featuring bobble-headed Martians and their mad schemes to take over Earth?

You should. Especially as Justin Trudeau’s Liberals are planning similar crazy attacks on Canadian small business. Only this time it’s not science fiction!

Provincial and federal taxes are set to rise substantially for high income individuals and small businesses across Canada. It’s imperative that you know what’s going to happen, when it’s going to happen, and what to do about it.

When did the attack start and how long will small business be a target?

The first shots were fired during the election campaign when Justin Trudeau made the nutty claim that small businesses - the engine of the Canadian economy, let’s not forget - “are actually just ways for wealthier Canadians to save on their taxes.”

Plainly we knew going into this government that things would be bad. Now it seems the situation may be even worse than previously feared.

This government isn’t going anywhere and is intent on draining the life out of small business for as long as it is in power. You need to be prepared for a lengthy and sustained assault.

What do we know so far?

The main area I’m concerned about is the government’s treatment of professional corporations and other corporations that don’t have more than five full-time employees.

In Quebec, the provincial government has already introduced a tough package of amendments for small business corporations, including a denial of access to the small business limit. The federal government seems likely to follow.

I’m even hearing that the Federal Liberals may limit or deny access to Canadian controlled private corporation (CCPC) status. This would bring with it a whole raft of other tiers that business owners would be blocked from, completely eliminating all opportunities a small business has to grow by organic means.

We already know that the refundable additional tax on investment income earned by a CCPC is increasing from 6.67% to 10.67%. This means that the total initial tax rate for such income will rise by 4% to 38.67%. Similarly, the amount of a CCPC’s investment income that can be included in the corporation's refundable dividend tax on hand (RDTOH) account will also increase by 4% to reach 30.67%.

Changes have been made to the refundable dividend tax refund mechanism and the gross-up factor in regards to foreign non-business income too. The rate at which refunds are made out of a private corporation's RDTOH account when it pays taxable dividends is rising to 38.33%. In 2015 it was 33.33%.

The refundable Part IV tax on certain taxable dividends received by private corporations is also increasing to 38.33%, up from 33.33% last year.

What about the provincial governments?

It should be clear by now that small businesses are fighting a war on two fronts. Both federal and provincial governments seem to have the engine of the Canadian economy in their sights. In Alberta the corporate general tax rate has shot up 2 points, putting the combined federal and provincial rate at 27%. The top marginal rate for dividends, whether eligible or non-eligible, has increased by 10%.

There has also been an increase in the tax cost of keeping pre-2016 retained earnings in a corporation and of distributing taxable dividends after 2015 (when the top marginal personal income tax rates on eligible and non-eligible dividends will be much higher).

The individual business owner and/or high income person has plainly become a target. In terms of personal rates, a motion passed by the House of Commons in December 2015 has ensured that individuals earning over $200,000 will be required to pay federal income tax at a rate of 33%. The previous rate was 29%.

Meanwhile in Alberta there has been a 50% increase in the top personal rates marginal bracket, rising from 10% earlier in the year to 15% now.

As if this wasn’t bad enough, the Federal Liberals have made no secret of their desire to continue raising these taxes for higher earners year-on-year.

What are going to be the consequences?

I hope it is now abundantly clear that we are entering a significantly oppressive tax environment.

Justin Trudeau says that these tax rate changes will reduce income inequality in Canada and drive economic growth. Don’t be fooled. The treatment of high income earners by this government is an absolute disincentive to earn more and only succeeds in chasing this country’s best in the direction of lower tax jurisdictions.

A nationwide ‘brain drain’ of high earners - everyone from doctors to entrepreneurs - will be the true economic consequence of this government’s new professional corporation rules.

What should you do?

If you’re a high-net-worth individual and/or own your own company then make an appointment with your tax advisor as soon as possible. The right strategy for your situation is unique to you and they can tailor a sound, effective solution to these new regulations based on your own individual needs.

Many people are currently doing exactly this. The Finance Department has admitted that there will be a $1.2 billion shortfall from its own previously projected annual revenues, a disparity it blames on bigger earners already making moves to protect themselves from the most damaging effects of this government’s tax plans.

That’s why my business Ocean West Financial Group (OWFG) has begun to see clients prepared to do anything they can to protect themselves from these new taxes. At OWFG, we have a proven track record of helping very-high-net-worth individuals respond effectively to evolving financial regulations with highly innovative, interesting and low-risk solutions. For this reason, I’m confident of success again.

This government’s attack on small business is going to be sustained and challenging. However, as long as you respond quickly and take the right steps as soon as possible, the most damaging effects can be neutralized. This will leave you free to focus on what’s most important: the running of your business.

G. Kim Hinkson is the President and Founder of Ocean West Financial Group, a team of Advanced Insurance Specialists based in Vancouver BC, Canada. He can be contacted at 604-662-3150 or kim.hinkson@oceanwestfg.com.

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