Regardless of your political stripes it makes sense to continue to support small business. It is currently the engine to the Canadian economy and anything that will be detrimental will simply stall the engine. For those of you who are left leaning, think of it this way. If you have a healthy economic engine you have the funds to pay for your social programs, government incomes and benefits as well as health care and infrastructure. Kill the economy and you increase debt and interest and the snowball will eventually weaken what you can provide and limit your spending ability.
There is a lot of misinformation being provided on the topic of the tax changes being proposed for small business. Those of you who think it is about fairness and affects only high income earners clearly haven’t read or don’t understand the proposed changes. I agree with fair taxation and our system is built around that with what is essentially a graded tax system where the higher the earnings the higher the tax rate. There is a lot of economic data that shows lower tax rates actually increase government revenues. Higher tax rates stifle economies, increase business failure and unemployment and kill spending on all 3 levels, personal, business and government which creates a very vicious negative cycle.
Basically there are 3 proposals in play here that are offending most small business owners and economists. The first has to do with income splitting. There are already some reasonableness tests with CRA and increasing that to reduce the ability to income split with children might be acceptable as a revised proposal. Many professional services however had fees disrupted or capped on the backs of allowing this tax strategy so it is highly unfair to them to repeal something put in place to replace something else. This will cost us professional talent particularly doctors down the road if implemented.
Further to that however, many low income small family corporations such as farms also benefit from spousal splitting. This allows them to essentially be able to survive on a lower gross income. If unable to do so, this could impact them by moving the income to one spouse and change their economic structure by $ 20-30000 annually and that is just based on $ 50,000 each, hardly what we would call high income earners. In addition this splitting only occurs where one spouse has either a low income or not at all, a situation that if it exists, suggest the spouse is most likely legitimately working in the family business already.
Are there some higher income earners that have advantages here above and beyond, for sure. Once the gross being split exceeds $ 300k both spouses are at the higher tax brackets and paying full load anyway. So, we’re talking about penalizing an entire group for roughly 10% of small business earners in the $ 2-300,000 range. Keep in mind those folks are still contributing at a high marginal rate, just saving about 10% by splitting. A tax that’s supposed to go after high income earners in fact is going after the lower and middle class. There’s no change to publicly held corporations which tends to have the real high earners.
The second and I think most crucial proposal is the taxation of passive assets in the corporation. Think of a small business earning only $ 75k in net business income. The business owner takes a salary of only $ 50 and leaves $ 25 in to be able to buy equipment or hire another employee to grow that business. If that money is now taxed additionally (remember there is already a corporate tax of roughly 15% of the amount they left in the company) there will be less funds available to grow the company. This has the potential for huge negative economic impact. There was an implication by those proposing these changes that this money left in the company was somehow “play money” for the business owner. That is extremely false. CRA now has very rigid testing of company held assets and if they are used for personal benefit they are already subject to additional taxation. Furthermore, any monies left in are still subject to personal income tax later when and if the business owner takes them out. So if the business owner is in the highest tax bracket this corporate earning is already being taxed at close to 70% before coming out to the shareholder.
This is a growth killer, for both economic revenue and jobs. Why would a business owner leave any money in their corp if they can take it out now and simply avoid the extra tax they are proposing. This totally does not make any sense.
Lastly they want to change tax planning for the sale of the small business. The tax changes proposed will prevent family farms from transitioning as they will be changing the tax treatment of many of these assets. Many business owners will get less for their companies and their buyers market will shrink. The current strategy limits the capital gain anyway so again it is not affecting the wealthy they claim to be going after. Many of these family businesses have used these strategies as their retirement planning and changing the rules midstream to people without access to pension plans and so on is not only unfair but would put more strain on providing government programs when they retire. For most of these business owners the government is essentially playing with their pensions. Imagine the uproar if the government decided to reduce their employees retirement incomes by 30 to 50%, which is akin to what this does.
I find it to be an extreme conflict of interest that Mr. Morneau has left IPP’s alone, one of the few tax strategies that would remain for the very high income earners and a specialty of his firm. Two very wealthy individuals are attacking the very middle class they lobbied to protect. Again, regardless of whether your political leanings go one way or another these changes do not support a benefit for Canadians in anyway. What little revenue they’ll generate will simply push the steam out of the economy, one that is truly driven by small privately held companies today. Canadians can not sit idly and be indifferent to this. If the federal government needs more revenue they should look elsewhere, either up the food chain or by bringing their spending under control. How many large corporations with Canadian shareholders pay out multi million dollar bonuses to executives even when the company loses money. There’s a lot more money cleaning that up than going after small business.