Federal Government Proposed Small Business Tax Changes

Recently the government of Canada proposed a tax reform under the premise of fairness, and affecting the wealthiest 1% of Canadians.

We argue that the measures proposed affect significantly more of the population than the wealthiest 1%, and that in many cases the outcomes are far from fair.

  • We respond that we are not the wealthiest individuals in Canada and we are affected by these new laws.
  • We also do not feel that imposing extra taxation on Canadians because they chose to be incorporated is fair. When they sell, they will be taxed disproportionately to our fellow Canadians who chose not to incorporate.

The proposal goes on to mention that the strategies are only available to the wealthiest of Canadians.

  • Again we respond that we are not the wealthiest of Canadians, they are actually the ones setting these laws.
    • We note that there is not a measure proposed to combat the avoidance of taxation from using offshore strategies. These strategies are expensive and truly only available for the wealthy and we wonder why efforts to counter these measures are not proposed.
  • We also note that the opportunity to incorporate is available to all citizens of this great country.

The white paper outlines a desire to instill feelings of trust and confidence in the federal government for citizens. The proposed tax changes will leave myself and other small business owners with no faith in this administration, and the sense that our system is no longer centered on fairness. This will serve only to erode trust. We submit that the proposed measures will have the opposite effect from their stated desire, for a large group of small business owners and farm families.

  • We do not have confidence in the fair treatment of taxation or our future.
    • Aside from the broad nature of the proposed changes, the laws already being drafted prior to such a minimal consultation period implies a lack of openness to hearing the thoughts of the constituents

We agree in fairness of taxation, and are offended by the dividend situation the paper had mentioned, however we argue that the measures proposed do little to affect the situation planned.  The tests proposed are subjective, and punitive therefore to all whom do not use the system in this fashion.  The organizations making the most money will be able to plan and use counsel to respond in a sufficient manner to reduce the burden on them.  Those with the least ability to pay for adequate professional advice will suffer the consequences.  These people also have the least to gain.  The entire paper is written as if all small business owners are using these taxation avoidance schemes.

  • We object to your implicit portrayal of small business owners as tax cheats. That’s untrue and offensive.  Small business owners have legitimately used existing tax law as just one of the many strategies involved in successfully operating a company in today’s fast paced global economy.  If there are cheats out there then go after them.  There are existing tax rules that could be updated and enforced that would effectively and efficiently deal with tax avoidance.
  • We do not think a subjective test will effectively catch those abusing the system.
  • Better plans exist to reduce these schemes– such as imposing taxes on special shares with unreasonable dividends, and gradually expanding from there if required.
    • Leave common shares alone, the ownership of these shares is a larger decision then dividend sprinkling and tax avoidance, and has serious consequences.
  • To use a hyperbole, we do not think it is right to poison the whole lake to kill an invasive fish.

As a business owner, employer, and taxpayer, I object to the spirit of and many of the details of these changes, as well as their being labelled to be in the interest of “fairness”. The current system is well integrated.  Comparing my earnings to those of an employee is unrealistic, and painting me as someone who is benefiting unduly from other taxpayers is unwarranted. Business owners assume all of the risk. We implore the federal government to reconsider these measures, and invest more into studies that could lead to tax reform that is not a disincentive to business.

We ask that you read the following and Contact your local MP and the Liberal party to register your objections to the changes.  The following briefly summarizes the tax changes and our positions are in bold.  Please feel free to adopt them as your own.

The list is not comprehensive, as the legislation was long, but should hit most of the points that will affect you.

A video series is also being developed to provide more in depth knowledge of each area, and will be available here on our website when released.

A link to a petition with similar views can be signed here Parliament of Canada petition E-1239, We ask that you sign it by October 1st, and send the link to everyone you know.

A summary of these changes and their potential impacts can be found here: http://www.cfib-fcei.ca/english/article/9533-federal-tax-changes-add-new-threats-for-independent-business.html

The government white paper outlining the proposed changes to small business taxation can be found here: http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp

The Ministry of Finance is currently accepting comments from the public. You can send your comments to fin.consultation.fin@canada.ca (deadline October 2nd).

The Canadian Federation of Independent Business has also created a petition that you can sign online: http://www.cfib-fcei.ca/english/article/9614-tax-change-petition.html

We also encourage you to get in touch with your local Member of Parliament, the Office of the Minister of Finance, and the Office of the Prime Minister to make sure your voice is heard.

Forest & Strathroy:
MP Bev Shipley
Email: bev.shipley@parl.gc.ca
Telephone: 519-245-6561
Website: www.bevshipley.ca

Sarnia & Wyoming:
MP Marilyn Gladu
Email: marilyn.gladu@parl.gc.ca
Telephone: 519-383-6600
Website: www.marilyngladu.com

Office of Bill Finance Minister Bill Morneau
Email: bill.morneau@parl.gc.ca
Telephone: 613-992-1377
Website: www.bmorneau.liberal.ca

Office of Prime Minister Justin Trudeau
https://pm.gc.ca/eng/connect

Other Members of Parliament
http://www.ourcommons.ca/Parliamentarians/en/members


What the new system imposes to do (a basic summary of key issues).

(1) Eliminate income sharing with family members.

  • Now you will have to prove to the government that the dividends (or any monies) paid to a related person are appropriate / reasonable.
  • Dividends paid for prior period contributions may not be valid.
    • We know that children from the self-employed are often used as labour from an early age. We do not feel that saving and reinvesting the earnings back into the business for a later date (say education) is unfair, yet that will no longer be our decision.  It is the governments.
  • Record keeping will be the undoing of many legitimate situations. Not fairness.
  • A fair proposal would be to apply this to special shares, and leave common shares alone as there are many factors that need to be considered when dealing with common shares. To have family members own common shares just for the purpose of dividend sprinkling is not advised.
    • Through this measure they also intend to eliminate many aspects of the capital gains exemption.
      • One of the key means of accomplishing this is to eliminate the ability to use the Capital Gains Exemption (CGE) while the asset is owned by a minor child or a trust.
        • This appears to affect both testamentary and inter-vivos trusts. As such it has real effect on many plans already in place.  It also will increase the taxation on death for all farmers leaving assets to their families.
        • We feel this is grossly unfair to those children whom may have lost a parent or both parents, and have to deal with the difficult circumstances that follow. Now our liberal government proposes it would be fair if they also bear additional taxes.
        • We also feel that the elimination of the exemption while a family deals with the tragedy is unwarranted.
        • We strongly are against the unfair taxation to those with disabilities whose assets may be managed by a trust. They should be entitled to the same taxation treatment as any other individual.
      • These rules do not only affect the top 1% of Canadians.
      • People do not choose when they will perish and their assets will be in trust. Children who have lost their parents, and disabled individuals should not be penalized for it.
    • We must urge our government to at an absolute minimum, exempt Graduated Rate Estates.
    • We would prefer that they take more time to zone in on the perceived abuse and take measures to eliminate the perceived abuse rather than create many cases of unfair treatment. (actual abuse of the taxpayer)

(2) Eliminate the ability to (un?)fairly earn passive income in a corporation.

  • One of the new proposals eliminate any recoverable taxes on passive income, thus leaving an integrated system to go to one of additional taxation.
  • This affects all portfolio assets, but also affects any rental income, or any green income (i.e. from solar or wind), gains on the eventual sale of your business assets, etc.
    • These passive incomes used to have a 52% tax applied when earned in the corporation, 38% was refundable when dividends were paid to the shareholders, where they in turn would pay the personal tax.
      • The government received the highest rate when earned, or the actual rate when passed through to the taxpayer.
    • Now they propose to leave the 52% tax rate in effect with no refundable amount, so when you take the earnings out you have effectively paid 52% tax, and additional tax on the remaining 48%. (could be greater than 70% tax)
    • You will be left will considerably less money than if the assets were not in the corporation.
    • This affects any person whom rents one unit in a building that they bought for their business, anyone whom has a solar panel or solar panels, anyone whom receives income from windmill leases, and anyone with any investments inside of their corporation. (includes farmland or other business assets)
  • We also feel that some level of investment is required for
    • Acquisition of new assets
      • This cannot be done on debt alone.
    • Stabilization of the business
      • Without money available for a rainy period many small businesses that may otherwise succeed will fail.
    • Retirement
      • Many businesses use their corporations for retirement. The amounts of monies are generally not significant enough to engage professionals for a RCA, or an IPP to be put in place and monitored.
      • Often small business owners make do on much less income than their employed counterparts most of the time they are in business, only to find themselves with large cash on hand as they wind down, selling off assets or realizing working capital as it is monetized. Not allowing for a structured withdrawal of these funds would create a significant additional tax burden on the individual compared to what would have been realized if earned in their income (say from employment) using the marginal tax brackets over time (now they are either taxed at the highest tax bracket as income is received in one year, or face over 70% taxes on the earnings those monies generate).
    • A fair proposal would not interfere with the tax fairness provisions already in the act such as the Refundable dividend tax on hand (RDTOH) and the Capital Dividend Account (CDA). These proposed measures are not at all fair and would cause significant additional tax burdens on all small business owners.
    • A refundable tax on portfolio investments would be fairer, but we ask that they allow for small amounts to be invested for the various purposes of acquisition, stability and retirement.
      • To have the tax not apply to any amounts less than $1,000,000 would allow for acquisition of new assets, stabilize the business, and allow for small amounts to be kept for retirement.

(3) Eliminate the use of capital gains in planning.

  • The government is concerned that people are using their families to convert monies that would otherwise be taxed as dividends into capital gains.
  • This is generally done through the sale of shares
  • Succession is also done through the sale of shares
  • Proposed measures are slated to go in effect as at July 18th, 2017, the day they released the whitepaper.
  • A fair measure would target the violators under GAAR or a GAAR like provision
  • A fair yet undesirable plan would be to up the capital gain inclusion rate to 66.66% or 75%,.
    • The wealthiest Canadians have the highest portion of their income put towards assets which would attract this income.
    • This is not even on the table despite the claim that they are going after the wealthiest 1%
    • Offshore tax planning strategies are not yet proposed, yet these plans are not for the wealthiest 1%, but the top 1% of the wealthiest 1%. (they could go after the real money instead of all small businesses)

We desire that the government takes more time to adequately review the proposals and side effects before they enact such punitive legislation to correct a few perceived abuses.  Do not poison small business in the name of fairness.  It is not right to penalize all small business owners for the perceived abuse of some.  Take time to zone in on the perceived abuse areas and leave legitimate planning in place