Small-biz tax plan a mistake

EDITORIAL: WHAT OTHERS THINK

Disappointingly, Federal Finance Minister Bill Morneau has decided to rush ahead with controversial changes in the taxation of small private businesses that limit the income they can retain as savings or pay out as salaries or dividends to family members.

In doing this, Morneau is ignoring the advice of the Senate’s national finance committee which, after holding cross-country consultations, recommended the changes be scrapped or at least delayed for a year while other reforms are considered. To make matters worse, Morneau is making the changes effective on Jan. 1, 2018.

So much for the government being open to independent advice and appointing independent senators to provide it. The minister can’t seem to rush fast enough into ignoring consultations and doing what he planned to do all along.

The department’s rationale for bulling ahead is that salaries and dividends paid to adult family members will be subject to a “reasonableness test” applied by Canada Revenue Agency to determine whether the payments reflect legitimate contributions to the business. Any income that didn’t meet CRA’s tests would be taxed at the highest marginal tax rate, even if the amount of income itself isn’t enough to put the recipient in the highest tax bracket. In other words, it’s a harshly punitive tax.

Finance is offering some exemptions from its reasonableness testing. A spouse over 65 would be exempt. This merely reflects the fact that all couples over 65 are allowed to split income for tax purposes.

Tests would not be applied to family members over 18 who make a “substantial labour contribution” of at least 20 hours a week. Also exempt would be family members over 25 who own 10 per cent or more of a business that earns less than 90 per cent of its income from “provision of services.”

None of this “tax fairness” really is fair or reasonable. Why single out service businesses, for example? Why only small private companies? There is no comparable test for wealthy people who control public corporations and pay dividends to family shareholders. And small business owners are rightly concerned that complying with these far-from-simple “simple rules” and how CRA bureaucrats decide to interpret them will be a nightmare of red tape and uncertainty.

They have good cause to worry about questionable, costly and unfair CRA interpretations. Lately the agency has been rightly criticized for trying to claw back child-tax benefits and credits from single mothers after CRA said they had not provided enough proof of marital status and child custody. CRA backed off and apologized after the cases were highlighted by CBC and in Parliament and after the federal tax ombudsman criticized the agency for poor communications and service and for not even accepting a court order as proof of custody.

Earlier this year, the government also quashed a move by CRA to tax employee discounts through an interpretive bulletin after the surprise move created a firestorm.

So small business owners have reason to worry about CRA’s reasonableness if given this power to decide whether family pay or dividends are fair, whatever that means. Morneau is being stubborn here, not reasonable.

An editorial from the Halifax Chronicle Herald (distributed by The Canadian Press)