Good policy isn’t simple
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?