A blitz on business owners

Minister of Finance Bill Morneau’s proposed changes to the Income Tax Act amount to a blitz against business owners.

The philosophy behind the proposals is to “level the playing field” and the example given in the summary overview is an individual living in Ontario and earning a salary of $220,000 versus his neighbour who earns the same amount through a private corporation and is able to reduce taxes through income sprinkling.

What is omitted is the couple, each spouse earning $110,000, which pays less in tax than their neighbours where one spouse earns $220,000 and the other spouse has no income. The issue is, of course, progressive tax rates which mean that the more you earn, the higher the rate of tax paid, not just the amount paid. In the U.S., couples file joint returns so there is no need for income splitting, unlike Canada.

Morneau said in a newspaper op-ed that: “An incorporated professional earning $300,000 with a spouse and two adult children can save about $48,000 in taxes by using just one of these loopholes. What that means is an incorporated professional could be taxed at a lower rate than a salaried nurse practitioner or police officer making much less a year.”

This is patently wrong. While the professional corporation may be paying tax at a lower rate, when the income is taken out by the professional, it is taxed at a higher rate.

He wrote further: “For passive investment income to provide an advantage over and above what is available to every Canadian through RRSPs and TFSAs, a business owner needs to earn more than $150,000. That is because the more you earn, the more you stand to benefit from these tax-planning strategies. No wonder some estimate that two thirds of the wealthiest 0.01 per cent own a CCPC.” Absolutely true, and he makes my point about progressive tax rates. Of

The first proposal targets income sprinkling. The prime minister’s father famously said the government has no business in the bedrooms of the nation. While the proposals may not actually intrude into the bedrooms of entrepreneurs, they certainly go into the kitchen and living room. There will be a “reasonableness” test on any income sprinkling. This will be a bonanza for us tax lawyers who have fun litigating reasonableness, which will include labour and capital contributions to the business, risk assumed and previous returns or remuneration. another tax benefit for small business owners.

The second proposal is, to my mind, the most insidious. It targets passive income earned by corporations. While that passive income is already taxed at the same rate as it would be if earned by the individual (our tax system is integrated to prevent a tax benefit from earning investment income in a corporation), the avoidance of the second stage of taxation when profits are removed from a corporation by the shareholder is now being targeted. How is it being targeted? We don’t know. The concept is so difficult (not to mention unfair) that Finance doesn’t know how to implement it. If enacted the proposals will make accountants bald and rich.

The final proposal is more technical in nature, and is part of the ongoing cat-andmouse game of tax planners converting ordinary income into capital gains and Finance coming up with new measures to block the latest tax plans.

With the top marginal rate in Ontario almost 54 per cent so that the fisc is the senior partner in your paycheque, and the latest antientrepreneur proposals, expect less investment in small business and more entrepreneurs leaving for lower-tax, more business-friendly jurisdictions.