Business fears bad news in wake of good news
Promise of cut to small-business tax applauded, but chambers worry about plans for other tax changes
Small businesses in the Okanagan are bracing for a good news-bad news double punch.
“Yes, it’s very much a case of us being happy today and possibly sad on Wednesday,” said Vernon Chamber of Commerce general manager Dione Chambers.
“We expect it to be a rollercoaster this week. We could be screaming yippee now and then oh-no later.”
Chambers was referring to the Liberal government’s piecemeal rollout of its proposed tax changes this week.
On Monday, Ottawa announced it will lower the small-business tax rate to 10 per cent in January from its current setting of 10.5 per cent.
By 2019, the rate will be nine per cent.
The tax reduction could save entrepreneurs thousands of dollars a year, allowing them to invest in their businesses and hire.
When the federal government tabled its proposed tax changes in the summer, chambers of commerce, a coalition of dozens of industry organizations and business owners mounted a vocal lobby against anything and everything that would see small business pay more tax.
“It’s about tax fairness and competitiveness,” said Kelowna Chamber of Commerce president Tom Dyas.
“It’s not fair or competitive to have small business pay more taxes when they are the people who are taking risk, driving the economy, hiring and having to be globally competitive.”
Small businesses aren’t the only ones who have complained about the proposed tax changes. Doctors, lawyers, accountants, farmers, premiers and even some Liberal backbenchers have denounced the tax proposals, contending they’d hurt the very middle class Prime Minister Justin Trudeau claims to be trying to help.
Trudeau and Finance Minister Bill Morneau have said the reforms will be designed to ensure they target wealthy individuals who’ve used the incorporation of small businesses to gain what the government maintains is an unfair tax advantage.
In hope of calming critics, Trudeau also announced Monday he will abandon at least one of the tax-reform elements: changing the lifetime capital gains rule. The adjustment is intended to avoid negative impacts on the intergenerational transfer of family businesses, like farms.
On another controversial proposal, the government intends to move ahead. The change is aimed at limiting the ability of business owners to lower their personal income taxes by sprinkling their income to family members who do not contribute to their companies.
Trudeau said a simplified version of the original proposal announced in July would be introduced, effective Jan. 1, 2018, but added the adjustments would be made clear as the government moves forward. He said nothing Monday of any impending changes to what is perhaps the most-controversial aspect of his tax proposals and, potentially, the most lucrative for government coffers: limiting the use of private corporations to make passive investments unrelated to the company. The government is expected to announce more changes related to its tax proposals later this week.
“Without a doubt, it’s good news that the small-business tax rate is going down,” said Dyas. “We’re grateful the government has listened to business on this topic. But there’s more announcements to come and they may not go our way.”
Dyas was referring to potential changes to income-splitting for small-business owners, the tax treatment of passive income investment earned in a private corporation and strategies to convert income into capital gains.
While they won’t know for sure until the government releases details, both chambers and Dyas have heard hints of the way decisions may go.
The Liberals’ announcement that they won’t change the lifetime capital gains rule is good for business, said Chambers.
Both Chambers and Dyas expect a tightening of income-splitting or income-sprinkling rules.
Currently, entrepreneurs and small-business owners are allowed to pay family members, even if they aren’t working in the company, to spread out income and reduce taxes.
The new rule could be that income-splitting can only be done with family members who actively work in the business.
The tax treatment of passive income investment earned in a private corporation could also be changed so that more businesses have to pay up.
Currently, such passive income is seen as a rainy-day fund and taxed favourably for businesses.
While most businesses could pay more tax on such income, the savings could remain in place for women entrepreneurs planning for maternity leaves.
Female entrepreneurs don’t have the same access to maternity benefits that female employees have.
“Right now, we have a very complicated tax system,” said Chambers.
“Anything done to make it more complicated and bureaucratic will make us uncompetitive with the U.S., which is working to simplify its tax system and make business more competitive.”
Even if some of the tax proposals don’t go the way that business wants this week, which is National Small Business Week, Dyas said chambers, business groups and entrepreneurs will continue lobbying.
“At this point, they are only recommendations,” said Dyas.
“There’s still a process before they can become law, so we’ll still lobby as hard as we can for tax fairness and competitiveness.”