September 15, 2017
Ms. Pam Damoff, MP
The Valour Building, Suite 810
House of Commons
Dear Ms. Damoff, MP,
I am writing to you to express my grave concerns with the proposed tax changes released by the Department of Finance on July 18, 2017. These new rules will be damaging for my business and for small, medium and particularly family owned businesses in this country. The Liberal “consultation paper”, quietly released on July 18th, represents the most sweeping tax overhaul we’ve seen in 50 years. We’ve been given 75 days for “consultation”.
I write to you on two accounts – from my perspective as an FCA, FCPA and tax practitioner who has dedicated her career to the service of small and medium sized and family owned businesses and the second as a hard-working business owner that employs more than 30 people.
The Liberal proposals fit with the government’s interest to be seen bringing “fairness” and neutrality to the tax system but the reality is small and medium sized private businesses will be profoundly affected and not for the better. There is a fundamental unfairness regarding how these major changes in tax policy are being presented and implemented by the Minister of Finance.
The Liberal consultation document compares the tax treatment of a business owner with that of an employee to point out corporations have “unfair” advantages. But, the comparison is nonsensical. There are excellent public policy reasons why owners are taxed differently than employees.
The private and family businesses I have the honour to call my clients don’t set up companies to gain an unfair tax advantage. The vast majority of private businesses in our country have been operating as corporations for their entire business life cycle. Our current tax system supports the hundreds of thousands of private businesses that employ millions of Canadians. These businesses add significant value to our economy and are a major contributor to our growth. In addition to the employment they create, these businesses in our community are very philanthropic, contributing in a significant way. The government’s tax proposals send a very negative message to current and future business owners about the nature and importance of their role in the economy.
The series of tax measures, as presented, would affect many businesses in a very complicated way for a small amount of tax revenue relative to our annual deficit. I would argue our current system is already too complex making it burdensome for businesses to comply and for the CRA to administer. These new rules will introduce even more complexity and uncertainty, particularly with respect to their application. The rules as drafted, introduce subjective assessments in their ongoing application, the potential for double taxation for business families, and possible retroactive application. This is not consistent with the Liberal Government’s 2015 promise to simplify our tax code. These changes also come on the heels of the government increasing personal taxes, cancelling reductions in the small business tax rate, tightening rules on partnerships and taxing work in progress. That’s on top of new carbon taxes, increased CPP and EI premiums.
It isn’t “fair” (to use the term that appears 21 times in the draft legislation) to compare a private business with an individual employee and try to equate their overall returns on earned investment income. Private businesses risk everything with no safety net. Unlike an employee, a private business owner does not receive a pension, health and dental benefits, have unemployment insurance or vacation pay. They invest their own capital to start their businesses and fund growth. They pledge their personal assets (i.e. their family home) as collateral for a bank loans and face liability for factors that may be beyond their control. Their employees depend on the business operating successfully for their livelihoods and financial security. And, if a business owner falls ill, makes a mistake, suffers a personal tragedy, acquires the wrong company or pursues the wrong market to expand in (I could go on) they risk losing it all. They are guaranteed nothing. The current federal tax system, which allows business owners to use corporations and do legitimate tax planning in recognition of the risk and sacrifice they make, has been in place for decades and it is inappropriate to now characterize these as “loopholes”.
Most tax practitioners recognize that our tax system could use some improvement. The tax proposals are purportedly aimed at making our tax system “neutral.” In some ways, they will, but in other ways they will make things less neutral. Under the new rules, public corporations and non-Canadian private corporations will be more favourably treated.
There are three main problems the proposals attempt to address
I. Converting income to capital gains –
In certain circumstances, corporate shareholders have been able to convert what would otherwise be dividend income into capital gains. The proposals to close these opportunities are appropriate but transitional rules are required.
II. Income sprinkling
The “income sprinkling” proposals include complex rules that would impose a significant compliance burden on taxpayers, and have an adverse impact on many families that own CCPCs with conventional share structures. This proposal is neither fair nor workable. It’s also unnecessary and would be extraordinarily complex. If the proposals are implemented, as proposed, along with the passive income proposals a tax rate of more than 73% will apply in Ontario which is approximately 20% higher than it is today. This is counter to the government’s statement “the proposals will not raise taxes”.
III. Passive income
Corporate business income is taxed at a lower rate than personal income, which leaves corporations more money to invest in their business. If a private company doesn’t need to reinvest to expand the business immediately – awaiting the right opportunity or saving to ensure they can continue to operate and pay their employees during a downturn – they may invest those earnings in passive investments.
It is the proposition of the government that business owners invest for the benefit of themselves and not their companies. They perceive an “unfair” tax advantage because corporations have more funds to invest as the tax rate on their business income is less than that of an individual. However, corporations do pay the same amount of tax on the passive investment income they earn on their after tax funds. Many of my clients and I, have had to forego or take a reduced salary in lean years to continue to pay their employees. Passive corporate investment portfolios and the refundable tax system are necessary tools to the entrepreneur.
I am deeply offended by the Department of Finance’s attempt to demonize all business owners and professionals – large and small – and the tax advisory community. The approach and language in the release and the tweets from Mr. Morneau and our Prime Minister I view as intellectually dishonest and disingenuous. These proposals describe businesses and business families as the rich who use corporations as “tax loopholes”, and suggest that the middle class are victims of all of this. This is unfair and totally false, as a majority of small and medium sized business owners and professionals are “middle class” Canadians. They are hard working individuals who also employ many other people in the middle class in just about every community across Canada. These proposals will undermine or eliminate routine “planning” done by private corporations and their shareholders using decades-old law that had purposely been drafted as policy – not “loopholes,” into our Income Tax Act. The federal tax proposals directly target and significantly impact business owners and professionals and by extension their employees and is therefore a negative for our middle class.
I respectfully request that you meet with the Minister of Finance on my behalf and on behalf of my clients to express our concerns and to ask for a delay in order to conduct a more fulsome review of the proposals. Significantly reforming the tax rules for private business with a 75-day consultation period is just not appropriate.
Lastly please pass on my view that the Minister of National Revenue, Finance Minister and Prime Minister’s use of language that encourages class distinction and animosity in our country to further their agenda is terribly disappointing and decidedly unCanadian.