Muddled small business tax reform
Small-business owners, family businesses and incorporated professionals right across Canada are confused and angry over tax proposals that federal Finance Minister Bill Morneau sprang on them in July. And rightly so.
These proposed changes for private corporations will fundamentally change how they are taxed, the rights of family shareholders and the ability of these small businesses to retain and invest earnings to provide a financial cushion and stability to ride out business challenges.
The outcry is coming from every sort of small-business operator -- from farmers to doctors -- who are concerned about the business uncertainties the changes create, the higher tax burden (potentially more than 70 per cent on investment income) and the rushed consultations (until Oct. 2) before changes are legislated for 2018.
They are also understandably unhappy with Mr. Morneau’s simplistic political spin — that he is merely closing loopholes used by “the very wealthy or the highest-income individuals” to “avoid paying their fair share” of taxes. As Jordi Morgan, Atlantic vice-president of the Canadian Federation of Independent Business, writes in our Business section today, the majority of small-business owners fall into a middle-income range. So government rhetoric that these changes are all about "growing an economy that works for the middle class" is just not credible.
In fact, it is seriously out of touch with the potential impact on operating a family business or ensuring a healthy supply of doctors and other health professionals. Most of these are incorporated and are frustrated with proposed penalties on savings within the corporation that they use to mitigate risks of borrowing, overhead, illness and loss of income. This matters for a profession that is ineligible for Employment Insurance and does not set its own fees.
For Nova Scotia, which is already having difficulty attracting doctors, and which is betting its primary-care future on establishment of multi-disciplinary businesses, or collaborative care practices, Ottawa’s tax changes are a healthcare disaster. Dr. Shawn Whatley, president of the Ontario Medical Association, told the Toronto Star recently that implementing the tax proposals would make Canada as a whole “an undesirable place to practise.”
For small business in general, the changes are highly discriminatory. Ottawa already has fair ways to limit splitting of business income through salaries or dividends paid to family members. Revenue Canada will not allow firms to expense family salaries against taxable income unless they are reasonable pay for work done. There is also a punitive “kiddie tax” on dividends paid to minor children, since they are not independent shareholders. But a proposal to impose a “reasonableness” test on dividends paid to adult offspring who are shareholders (to determine if they contributed to the company) is not reasonable.
There is no such condition on public company shareholders. You get a Royal Bank dividend if you own the share. You don’t have to work there, be a certain age or have paid for the share. Adults who own private shares shouldn’t be treated any differently.
As with proposed penalties on privatecompany savings, Ottawa would be treating small business less favourably than big public companies, hardly a pro middle-class initiative. This is a misconceived tax reform and Mr. Morneau should scrap it or take it back to the drawing board.