Good pol­icy isn’t sim­ple

The Amherst News - - OP-ED - Jonathan McClel­land is the CEO of the Cum­ber­land Busi­ness Con­nec­tor

In the past few weeks there has been a lot of at­ten­tion paid to the fed­eral gov­ern­ment’s pro­posed tax changes for small busi­nesses. One crit­i­cal as­pect that I have not heard much dis­cus­sion on is the pro­posed in­crease in tax­a­tion of div­i­dends. This has the po­ten­tial to se­ri­ously im­pact small busi­ness suc­ces­sion as cur­rent own­ers near re­tire­ment.

The largest num­ber of busi­nesses in Canada are small busi­nesses. Many of these small busi­nesses such as elec­tri­cians, plumbers, farm­ers, gas sta­tion own­ers, mar­ket gar­den­ers and in­de­pen­dent gro­cery store own­ers will never em­ploy more than a hand­ful of em­ploy­ees. They are crit­i­cal to the smooth run­ning of our com­mu­ni­ties and econ­omy, par­tic­u­larly in ru­ral ar­eas and small towns.

The Cana­dian econ­omy is on the brink of a mas­sive change in own­er­ship of these small busi­nesses. Many are be­ing run by en­trepreneurs who are be­tween 60 and 70 years old. Many are hop­ing to be able to sell their busi­nesses in the next 5-10 years. The money from the sale of the busi­ness is of­ten a ma­jor part of their an­tic­i­pated re­tire­ment in­come. There are im­por­tant ques­tions that these older en­trepreneurs need to ask in­clud­ing; will they be able to sell the busi­ness, for how much, and how will a younger en­trepreneur be able to af­ford to buy the busi­ness?

This is­sue of suc­cess­fully tran­si­tion­ing a small busi­ness from one owner to an­other is crit­i­cal. Fail­ing to tran­si­tion a busi­ness to new own­ers, will re­sult in many vi­able small busi­nesses sim­ply clos­ing. This means that the en­trepreneur’s re­tire­ment is dif­fi­cult, and em­ploy­ees lose their jobs. The dam­age doesn’t stop here. Of­ten in small vil­lages and ru­ral ar­eas when a busi­ness such as the last com­mu­nity gas sta­tion or con­ve­nience store closes, cus­tomers al­ter their shop­ping habits and go to larger cen­tres. This takes cus­tomers out of a small com­mu­nity, and of­ten re­sults in other busi­nesses like hard­ware stores or café’s los­ing cus­tomers forc­ing them out of busi­ness.

The fed­eral gov­ern­ment’s pro­posed changes to the tax­a­tion of div­i­dends will make it much harder to keep small busi­nesses op­er­at­ing. When a young en­trepreneur wants to take over a com­mu­nity busi­ness, he or she of­ten has the de­ter­mi­na­tion and skills to be suc­cess­ful, but doesn’t have the money. Some­times, a young en­trepreneur can buy a busi­ness only if a com­mu­nity mem­ber be­comes a part­ner in the busi­ness. In these cases, the part­ner may not work in the busi­ness but re­ceives div­i­dends for their in­vest­ment if the busi­ness is suc­cess­ful.

Cur­rently in Canada, div­i­dend in­come (such as this) is taxed at a lower rate than em­ploy­ment in­come. This is to en­cour­age in­vest­ments in busi­nesses that will em­ploy more Cana­di­ans. It also con­sid­ers the risk that an in­vestor takes when they in­vest in a busi­ness that may or may not be suc­cess­ful.

The in­jus­tice in the pro­posed tax changes is as fol­lows. This re­duced tax on div­i­dends will still be avail­able for div­i­dends earned from pub­licly listed com­pa­nies such a RBC, Emera, or Shell. Re­duced taxes will not be avail­able for div­i­dends earned from in­vest­ing in a pri­vate com­pany such as a hard­ware store, gas sta­tion, or lum­ber mill if the lo­cal busi­ness is owned by a rel­a­tive. Does the gov­ern­ment re­ally feel that peo­ple who in­vest in their com­mu­nity should be taxed at a higher rate than some­one who in­vests in a bank, power util­ity or the oil sands?

Ac­cess to fi­nanc­ing is one of the big­gest bar­ri­ers fac­ing small busi­nesses across Canada. Does the gov­ern­ment re­ally think that they need to en­cour­age fi­nan­cially well-off peo­ple to not in­vest in Amherst or Parrs­boro, but in­stead in­vest through the Toronto Stock Ex­change?

I have high­lighted just one as­pect of the mas­sive changes to small busi­ness tax­a­tion. The Prime Min­is­ter has stated, that they are just mak­ing a few “tweaks” to the small busi­ness tax en­vi­ron­ment. This re­minds me of Pres­i­dent Trump’s re­as­sur­ances to Cana­di­ans that he only wanted a “few tweaks” to the North Amer­i­can Free Trade Agree­ment.

The num­ber of busi­nesses (and Cana­di­ans) that the whole tax changes will im­pact was clar­i­fied in an in­ter­view on Sept. 11, 2017. Fi­nance Min­is­ter Bill Morneau was be­ing in­ter­viewed by Anna Maria Tre­monti on The Cur­rent, and noted, “What we are at­tack­ing right now, is what we see as the big­gest chal­lenge that we are fac­ing in the tax sys­tem. We’ve ad­van­tages go­ing to the wealthy few and that is cre­at­ing some real dif­fer­ences in po­ten­tial op­por­tu­ni­ties. So, as we look at these it is about say­ing if we have gone from 1.2 mil­lion to 1.8 mil­lion in­cor­po­rated pro­fes­sion­als over 15 years.”

Based upon this state­ment, it ap­pears that the “wealthy few” is con­sid­ered to be 1.8 mil­lion in­cor­po­rated busi­ness own­ers and their fam­i­lies. If we were to con­ser­va­tively es­ti­mate the av­er­age fam­ily to con­tain three peo­ple, then these changes will im­pact at least 5.4 mil­lion Cana­di­ans who are in busi­ness. This is much larger than one per cent of Canada’s pop­u­la­tion which the Prime Min­is­ter and Fi­nance Min­is­ter say that these changes are fo­cused on.

There has been a very di­verse group of Cana­di­ans telling the gov­ern­ment that there will be sig­nif­i­cant unan­tic­i­pated dam­age to our econ­omy. Why not take to heart an old proverb that states, “in the mul­ti­tude of coun­sel­lors there is safety.” Wouldn’t it be bet­ter to set aside this flawed plan and proac­tively en­gage in dis­cus­sions with the busi­ness com­mu­nity for the next 12-18 months and come up with a plan that will re­sult in less dam­age to our econ­omy, es­pe­cially in At­lantic Canada?

McClel­land

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