Op­po­si­tion to changes

Investment Executive - - FRONT PAGE - BY RUDY MEZZETTA

in­vest­ment in­dus­try or­ga­ni­za­tions are work­ing fever­ishly be­hind the scenes — sur­vey­ing mem­bers, speak­ing with fed­eral gov­ern­ment of­fi­cials and pre­par­ing sub­mis­sions — to per­suade Ottawa to re­con­sider what mem­bers of the in­dus­try believe are deeply flawed pro­pos­als to change the way in which pri­vate cor­po­ra­tions are taxed.

“These pro­pos­als, the way they’ve been writ­ten, will have

un­in­tended im­pacts on the over­all econ­omy, on po­ten­tial job cre­ation, on in­no­va­tion and risk-tak­ing, and even on phi­lan­thropy,” says Guy Le­gault, pres­i­dent of the Con­fer­ence for Ad­vanced Life Un­der­writ­ing (CALU) in Toronto.

Adds Susan Alle­mang, head of reg­u­la­tory and pol­icy af­fairs with the In­de­pen­dent Fi­nan­cial Bro­kers of Canada (IFB) in Mis­sis­sauga, Ont.: “We would like for them to back off [on the pro­posed changes] and let us all work to­ward some­thing that will re­solve the is­sues that [the gov­ern­ment] is con­cerned about while not suf­fo­cat­ing the small-business per­son or en­tre­pre­neur who has set up [tax plan­ning] in good faith un­der the ex­ist­ing rules.”

In July, the Depart­ment of Fi­nance Canada re­leased a con­sul­ta­tion pa­per on the use of cer­tain tax-plan­ning strate­gies in­volv­ing pri­vate cor­po­ra­tions: the “sprin­kling” of i ncome among fam­ily mem­bers; the re­ten­tion of pas­sive in­come; and the con­ver­sion of a pri­vate cor­po­ra­tion’s in­come into cap­i­tal gains. Fi­nance Canada’s pa­per ar­gues that these strate­gies pro­vide wealthy Cana­di­ans ac­cess to un­fair tax ad­van­tages. Stake­hold­ers had to sub­mit their sub­mis­sions by Oct. 2.

Since then, in­vest­ment in­dus­try groups have spo­ken out against the pro­pos­als, ar­gu­ing that the gov­ern­ment’s ap­proach un­fairly tar­gets small-business peo­ple and en­trepreneurs, many of whom would qual­ify more as mid­dle-class than wealthy.

These in­dus­try groups claim that small-business own­ers take risks to start up ven­tures with­out ac­cess to safety nets, such as em­ploy­ment in­sur­ance (EI), that are avail­able to em­ploy­ees and that the sec­tor al­ready faces the prospect of higher costs associated with in­creas­ing reg­u­la­tion and higher EI and Canada Pen­sion Plan pre­mi­ums.

CALU, the IFB, the In­sti­tute of Ad­vanced Fi­nan­cial Plan­ners, the Char­tered Pro­fes­sional Ac­coun­tants of Canada, the Cana­dian chap­ter of the So­ci­ety of Trust and Es­tate Prac­ti­tion­ers (a.k.a. STEP Canada) and the na­tional body of the Cana­dian Mort­gage Bro­kers As­so­ci­a­tion, among oth­ers, stated they were pre­par­ing sub­mis­sions.

In late Au­gust, 35 as­so­ci­a­tions rep­re­sent­ing a wide range of in­dus­tries (in­clud­ing sev­eral un­re­lated to the in­vest­ment in­dus­try) formed the Coali­tion for Small Business Tax Fair­ness. That group sent a let­ter to fed­eral Fi­nance Minster Bill Morneau ask­ing him to shelve the pro­posed tax changes in favour of con­sul­ta­tion on ad­dress­ing any per­ceived short­com­ings in the tax laws in­volv­ing pri­vate cor­po­ra­tions. By mid-Septem­ber, the coali­tion’s mem­ber­ship had swelled to in­clude more the 60 as­so­ci­a­tions.

One of the coali­tion’s mem­bers is the Mis­sis­sauga, Ont.-based Cana­dian In­sti­tute of Fi­nan­cial Plan­ners (CIFPs). The po­si­tion of the CIFPs is that the pro­pos­als raise un­cer­tainty for its fi­nan­cial plan­ner mem­bers, some of whom are in­cor­po­rated, but, more i mpor­tant, for its mem­bers’ clients, many of whom are en­trepreneurs.

“In gen­eral, this is a re­tire­ment is­sue,” says Keith Costello, pres­i­dent and CEO of the CIFPs, re­fer­ring to Fi­nance Canada’s tar­get­ing of the rules re­gard­ing the re­ten­tion of pas­sive in­come. “Small­busi­ness own­ers have worked with their [fi­nan­cial] plan­ners to cre­ate long-term re­tire­ment strate­gies within the [cur­rent] rules. Tak­ing them away now, chang­ing the re­tire­ment plan­ning struc­ture mid­way through af­ter [plan­ning] for years, is go­ing to cre­ate some big prob­lems for small-business own­ers. They don’t have ac­cess to com­pany pen­sions or to de­fined­ben­e­fit pen­sion plans like civil ser­vants do.”

Morneau’s of­fice con­tacted the CIFPs di­rectly to dis­cuss the group’s con­cerns. “We ap­pre­ci­ate that,” says Costello, who adds that the group hasn’t yet de­cided to make a sub­mis­sion of its own.

Fi­nance Canada also has con­tacted the IFB di­rectly to dis­cuss that group’s con­cerns, Alle­mang says. The group in­tends to speak with Fi­nance Canada about the pos­si­ble ef­fect that the pro­posed changes will have on its mem­ber­ship, who, con­cur­rently, also are con­tend­ing with the prospect of a ban on em­bed­ded com­mis­sions and trailer fees, she adds: “This is a dou­ble whammy” for mem­bers who sell in­vest­ment funds and are in­cor­po­rated.

Ac­cord­ing to Ian Rus­sell, pres­i­dent and CEO of the Toron­to­based In­vest­ment In­dus­try As­so­ci­a­tion of Canada (IIAC), the pro­posed tax changes have the po­ten­tial to be “dam­ag­ing to small­busi­ness fi­nanc­ing, cap­i­tal for­ma­tion and job cre­ation,” par­tic­u­larly as they re­late to the tax treat­ment of pas­sive in­vest­ments in a pri­vate cor­po­ra­tion. The ef­fec­tive tax in­creases associated with the new rules “run counter to gov­ern­ment ef­forts to pro­mote small-business growth and devel­op­ment.”

The IIAC doesn’t in­tend to make a sub­mis­sion to Fi­nance Canada, but has been work­ing in con­junc­tion with STEP Canada’s com­mit­tees, a col­lab­o­ra­tion that pro­duced six case stud­ies re­gard­ing how the pro­posed tax changes may have neg­a­tive, un­in­tended con­se­quences for small busi­nesses. The IIAC will sup­port STEP Canada’s sub­mis­sion.

The Toronto-based Cana­dian Fed­er­a­tion of In­de­pen­dent Business (CFIB) states it has had dis­cus­sions with Fi­nance Canada of­fi­cials in re­cent weeks as the group pre­pares its sub­mis­sion. Among other is­sues, CFIB mem­bers are con­cerned about the added com­pli­ance bur­den associated with Fi­nance Canada’s pro­pos­als, such as the in­tro­duc­tion of a “rea­son­able­ness test” for de­ter­min­ing the tax treat­ment of cer­tain amounts re­ceived by fam­ily mem­bers from a pri­vate cor­po­ra­tion.

“[That re­quire­ment] adds a level of com­plex­ity and pa­per­work,” says Corinne Pohlmann, se­nior vice pres­i­dent of na­tional af­fairs and part­ner­ships with the CFIB. “We al­ready know that red tape is right be­low to­tal tax bur­den as the big­gest is­sue for small busi­nesses in terms of what they have to deal with on a day-to-day ba­sis.”

In­vest­ment in­dus­try as­so­ci­a­tions state they will con­tinue to sur­vey their mem­bers and pro­vide them with in­for­ma­tion and up­dates. They are also en­cour­ag­ing mem­bers to con­tact their lo­cal mem­bers of Par­lia­ment.

“Ul­ti­mately, what we’re say­ing is ‘Let’s just slow this thing down’,” says Greg Pol­lock, pres­i­dent and CEO of the Toronto-based Fi­nan­cial Ad­vi­sors As­so­ci­a­tion of Canada (a.k.a. Ad­vo­cis), which is a mem­ber of the coali­tion. “Let’s take these pro­pos­als off the ta­ble and have a broader, longer, deeper con­ver­sa­tion [about the tax­a­tion of pri­vate cor­po­ra­tions].”

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