In July, Finance Minister Bill Morneau introduced a draft legislation proposing to overhaul taxation for private companies, ostensibly to eliminate “unfair tax advantages” that Canadian-controlled private corporations (CCPC) are perceived to have.
The supposed goal may be tax fairness, but the proposed changes couldn’t be less so. Instead they unfairly target a group of the population taking all the risks, and claw back incentives that exist to incentify small business (and, in turn, jobs), that help owners succeed in the face of economic uncertainty.
Proposed Changes: Are they Counterproductive?
1. One change promises to crack down on “income sprinkling,” the shifting of a portion of income to family members through salary or dividends. Let’s set this straight: during economic downturns, entire families bear the brunt of entrepreneurship, not just the entrepreneur. Why shouldn’t they also be part of the business’s success?
As one small business owner recently told CBC News, “If, God forbid, I divorce my wife of 33 years tomorrow, the government would say that half this business belongs to her. She stayed home and raised our three children, she’s participated in the risk, the whole family did. So why shouldn’t she be paid?”
2. Another proposal takes aim at “passive investment” in the corporation. Money left in the business is taxed at a lower small business rate. This is not an unfair practice, rather it provides a much-needed safeguard to shield both the small business owner and employees during tough economic times. It ensures small business owners have a shelter in which to weather economic storms.
3. A third reform would limit the ability to convert a corporation’s regular income into lower-taxed capital gains. While there may be instances in which this benefit is used beyond its original intent, lumping it into the so-called Fair Tax Plan does not address that, nor the need to maintain fair and even footing for entrepreneurs.
“The measures in the Fair Tax Plan do not just impact the 1%. In fact, the Fair Tax Plan undermines all Canadian small business owners, which, according to the Federal Government’s own statistics, comprised over 97% of Canadian businesses in 2015 and include restaurant owners, franchisees, real estate agents, plumbing contractors and a broad range of other small businesses” states a review prepared by Michael Goldberg of Minden Gross LLP.
What’s Wrong with this Thinking?
These tax incentives are critical in supporting small business owners and entrepreneurs to build lives, invest in their families, in their communities, and in their retirement planning, while contributing to the economic fabric of the country. Small business owners don’t have guaranteed pension plans like many government employees. More often, an entrepreneur’s retirement fund is directly linked to the success (or failure) of their business.
As well, passive investments and capital gains allowances are an integral part of many small business owners’ retirement strategies. It would be punitive to take that away mid-stream in their career, and foolish to take it away and de-incentivize entrepreneurs when starting their own business.
Here’s my Point…
Small businesses are the lifeblood of Canada. Nearly half of everyone working in the private sector is employed by a small business, and they contribute nearly one-third (30%) of the country’s GDP. In fact, 1.14 of the 1.17 million employer businesses in Canada are SMEs (small and medium-sized enterprises). Our political leaders need to identify the massive need for small – medium sized business in our country. It’s our entrepreneurs that drive the economy. We can’t afford to see that change.
The Fair Tax Plan was initiated by bureaucrats who, more than likely, have never invested their own money or sweat equity into a small business. They have no idea what it’s like to get the next sale to pay rent, or employees, and to bear the significant risk associated with being an small business owner/operator.
For what may be considered a rounding error in government revenue, an entire segment of the population has been unfairly characterized. And, if the proposals in the Fair Tax Plan go through, many small businesses across the country will be forced to close shop, ultimately eating into any tax gains with increased unemployment. One thing is for certain, it doesn’t take into account the risks and realities faced by small business owners and can’t help but stifle entrepreneurship—an area in which Canada has excelled.
Ironically, throughout the public consultation process that has just concluded relative to the proposed tax changes, we have not heard any commitment to rationalize the size of government.
Are you angry yet? You should be! Ask yourself: would you rather see small business grow and prosper, or more big government consuming more of your tax dollar?
Had enough? Call or write your MP and share your anger. Tell them: instead of imposing increasingly difficult conditions on entrepreneurs and small business, maybe it’s time for government to truly understand what it takes to run a business. I know hundreds of independent entrepreneurs ready to teach the class!