The Power of Perspectives

The Canadian Bar Association

Kim Covert

Parts of small business tax amendments fall ‘outside the realm of mischief’

June 26 2017 26 June 2017

A proposal in the 2016 federal budget to change section 125 of the Income Tax Act dealing with the Small Business Deduction risks creating unintended consequences for businesses across the country, says the Joint Committee on Taxation of the CBA and Chartered Professional Accountants of Canada.

The Joint Committee sent a submission outlining its concerns with the proposed amendments to Finance Canada last summer. It prepared a second submission for the Canada Revenue Agency in February and then met with members of the CRA, who agreed that the statutory language supports the committee’s interpretation. The CRA said that the matter would have to go back to Finance Canada. So in June, the Joint Committee sent its February submission to the Tax Policy Branch of Finance Canada.

The purpose of the amendments is to ensure a single business obtains access to a single SBD limit and, on the face of it, the Joint Committee believes this goal is reasonable – but that the amendments could be interpreted more far more broadly than anticipated.

“We are concerned that the rules go beyond preventing access to multiple small business deduction limits for a single business to adversely affect parties carrying on independent businesses, and so outside the mischief these provisions seek to target,” the submission says. “Furthermore, these rules operate to not only deny multiplication of the SBD, but go so far as to decrease overall entitlement to the SBD to below $500,000 in some cases.”

The submission provides a number of examples of areas where the new rules create unintended consequences, and would block legitimate small business deduction claims. It mentions several times that the changes “go beyond the stated policy objectives,” constitute “obvious over-reach,” or are “outside the realm of mischief these amendments were targeting.”

The Joint Committee does not believe the drafters of the proposed amendments meant to capture such a broad range of activities as it interprets them to include.

“We would urge CRA to consider interpretations of the law which may mitigate these concerns or, where the clear words of the legislation preclude such interpretation, that CRA clearly and explicitly state its view in this regard and confirm the adverse result to the noted taxpayer(s). This would hopefully encourage the Department of Finance to consider legislative changes to address areas where CRA interpretation cannot resolve the inequity,” the submission says, and suggests a number of areas where a legislative fix could be made, or guidance should be issued.

Over-reach is not the only problem with the proposed amendments.

“New section 125 is astounding in its complexity,” the Joint Committee says, leaving open the possibility that small business owners and the accountants they work with will misinterpret or misapply them. It’s in the interests of both the CRA and taxpayers that the CRA provide guidance and assistance.

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