Proposed Tax Changes

Shout it from the treetops to your local MP’s before it’s too late

We encourage all of our network associated with small and medium sized business, SME’s, to be very vocal about their opinions on these changes in the upcoming few days. Our feeling from talking with many accountants and tax lawyers as well as reading close to 100 information pieces on the proposed changes is that they will have a significantly negative impact on the majority of our clients and the future of the economy here in Ontario and for that matter nationally.

What are the proposed changes: Essentially there is 3 major points of discussion. The first is income sprinkling which allows business owners to share portions of their incomes with family members. The second is increased taxation of passive investment income being maintained in the corporation. The third is aimed at those who change income into a form of capital gain to reduce their marginal tax rate.

What was the goal: Whatever their true motivations, the stated goals of the changes were to produce a more level playing field for taxation for business owners over employed individuals. Voiced as aimed at high income earners, these changes affect many business owners in the middle class.

The Obvious Flaws – First of all, extremely poorly timed and very short consultation period for such major changes to the income tax act. You also can’t compare an employee to a self employed corporation for a whole variety of reasons on a straight face level. Small business owners for starters do not typically have consistent incomes. There are good years, bad years and budgeting for both requires owners to leave money in their corporations for financial prudence. They simply can’t print money when they spend more than they take in.

Next, most small business owners count their business equity as the largest portion of their retirement income. Odd they don’t want this to be split yet the current environment continues to allow high income public employees to split pensions. This doesn’t seem to be in the spirit of “fairness”. In addition these changes will alter how businesses grow their operations and this will eliminate job growth, innovation and frankly financial security for many SME’s. By the way, how in the world is CRA going to audit these changes for spousal and family allocations in an SME? This will open up the SME’s and CRA for many costly audits and as a by-product lawsuits about what would be an impossible and unproveable interpretation of the tax changes. Also, how many professionals such as doctors will leave as this income sprinkling through incorporation was a concession given to them in exchange for holding their fees.

The changes will make it next to impossible to have businesses pass from one family member to another on a fair level, taxing those situations more than selling to an outsider. This would be harmful to family farms. Leaving money in the company to use for growth or that rainy day moves that tax level to over 70%, certainly that can’t seem fair and reasonable to anyone. It will almost certainly force many business owners to draw all possible income out of their corps as earned leading to the previously stated issues about solvency and growth. It’s also worth noting there was no reform proposed that would affect the Prime Ministers fortune or IPP’s, a high income earning specialty of the finance minister’s firm.

Regardless of your political stripes, this is not attacking the people and inequalities it is stated to correct, it is an attack on all small business. We need everyone to voice their concerns and implore the government to not only extend the review period but to consider all those affected. In any tax system there will always be a few things that need to be corrected or evolved as time goes on, particularly the more complex it is. Making a major change like this without proper studies and consultation is irresponsible. Have your voice heard before it’s too late.

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