As a long-time tax accountant and financial consultant whose client list largely consists of small businesses (I work for a lot of landscapers, as well as gym owners, hair salon owners, and the like) and professional practices (I’m also on retainer by several realtors, law offices, and medical clinics), it’s a big part of my job to keep on top of changes to the Canadian tax code.
Lately, I’ve been fielding a lot of questions about the recent alterations made to the capital gains tax by the federal government—and with good cause. The changes are significant, especially in how they pertain to small businesses, and some are quite complex. That being the case, explaining them to people who don’t have a background in accounting or tax law can sometimes prove challenging.
With the coming tax season only a few short months away, understanding these changes will be crucial for small business owners for the purposes of planning and compliance. I’ve decided to write out a clear explanation of the salient points in plainspoken terms.
So, with the caveat that the tax situation of each individual business is unique, here’s a general overview of how the new capital gains tax amendments passed by the Trudeau government will affect small businesses and professional practices in what I hope is ‘non-accountant speak.’
Increase in the Capital Gains Inclusion Rate
Previously, only half of your capital gains were taxable. Now, the inclusion rate has increased to 60%. This means that if you sell an asset for a profit, you’ll have to include 60% of that profit in your taxable income. For small business owners, this could mean a substantially higher tax bill if you sell your business or any of its assets.
Changes to Small Business Deduction
There have also been adjustments to the small business deduction limits. This mechanism was designed to allow small businesses to reduce their taxable income. With the new rules, some businesses might see changes in how much they can claim, potentially impacting their overall tax burden.
New Reporting Requirements
As of January 1st, 2024, there are additional reporting requirements for capital gains. Come tax time, you’ll need to provide more detailed information on how you calculate your gains and losses. This extra paperwork can be time-consuming, so it’s a good idea to get familiar with the new forms and requirements as far ahead of time as possible. I’m afraid there’s no way to sugarcoat this one—it’s going to be a headache.
Transitional Rules
To soften the blow of these changes and mitigate some of the potential tax burdens, the government made some transitional rules for assets that were acquired before these changes were announced. This means that if you already own assets, you might be able to apply the old tax rules to them, giving you some time to adjust to the new system and alleviating the coming year’s final bill at least a little.
For small business owners, especially those planning to sell off their business or significant assets, these changes mean you’ll need to plan ahead, as the higher inclusion rate will likely affect your financial projections and tax planning. You might find yourself paying more in taxes than you anticipated, so it’s important to have a close look at your business’s financial strategy bearing these new laws in mind.
Professional practices, such as medical clinics or law offices, that hold significant assets will also feel the impact. The new reporting requirements could lead to even more administrative work (as if doctors, lawyers, and realtors don’t have enough of that already), and the changes to the rules surrounding deductions could affect your bottom line significantly. All that being said, being proactive and adapting your strategies to accommodate these changes can help mitigate any negative effects.
Canada’s new capital gains tax laws will undoubtedly affect small businesses and professional practices from the Atlantic to the Pacific to the Arctic. If any owners, partners, or proprietors out there are still fuzzy on how the new tax laws might apply to you, I wholeheartedly recommend reaching out to a credentialed CPA or professional financial consultant such as myself for further advice.
Until then, stay informed, stay prepared, and stay profitable!