Bad news for business owners, corporate class investors

This year’s federal budget makes unwelcome changes for small business owners and clients who own corporate-class funds, says Jamie Golombek, managing director of Tax and Estate Planning at CIBC Wealth Strategies Group.

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One of the main appeals of the corporate-class mutual fund structure is the ability to shift between fund mandates with no tax consequences. “For example, Class A shares could be Canadian equities, Class B shares could be European equities, Class C shares could be Latin American equities, and you had the ability to switch among the various shares of the corporation on a non-taxable basis,” explains Golombek.

That’s ending after September of this year, he notes. “Starting October 1, 2016, if you make that change in a mutual fund corp, those switches will be taxable. This is a major, unexpected change, and my advice is make sure you do any portfolio rebalancing prior to […] October 1.”

Read: Mutual fund corporations lose tax advantage

A key change for small business owners, says Golombek, is the freezing of the small business tax rate at 10.5% on the first $500,000 of active business income. The previous government introduced phased-in reductions that would have seen the rate drop from 11% to 9% by 2019. Reductions beyond 10.5% will no longer happen.

Another key change for business owners, notes Golombek, is that “the eligible capital property regime will be replaced with a capital cost allowance at a rate of 5% — the old rate was 7%.”

Read: Our 2015 analysis of the eligible capital property regime

The Liberals are also introducing anti-avoidance measures to clamp down on complex tax strategies involving life insurance. One involves using “the value inside a life insurance policy to extract money out of corporations,” says Golombek. The government “is also looking at some more aggressive strategies where small business owners have multiplied the Small Business Deduction using various sophisticated tax strategies. Those are […] being attacked specifically.”

For Golombek, one of the biggest surprises in this year’s budget was the elimination of a rule proposed by the previous government that would have allowed donations involving private company shares or real estate to be made to charity free of capital gains tax. Under the proposal, which would have taken effect in 2017, if you donated the proceeds from the sale of private company shares or real estate within 30 days of the sale, you’d be exempt from capital gains tax.

“The Liberal government has announced they will not be proceeding with that particular tax measure, […] which is an unfortunate move, and charities will feel the brunt of this,” Golombek concludes.