An unfair picture

Proposals punish business owners, families; discourage economic growth, entrepreneurship

Small business is the heartbeat of our Island economy. Small business could be your local garage, the bakery down the road, or the clothing store on the corner. They are our farmers, fishers and tourism operators. They create jobs. They invest their money in both their business and their community.

At the Greater Charlottetown Area Chamber of Commerce, we celebrate business. According to the Business Development Bank of Canada, P.E.I. has the largest number of small business jobs per capita in the country. Business growth is the solution to many of the province’s economic challenges, and we credit much of P.E.I.’s economic success to the hard work of our small business owners.

The federal government has released a document proposing major changes to how businesses are taxed. The tone of this document paints an unfair picture of business in Canada.

Government suggests the changes are about fairness, and compares the tax treatment of a business owner with that of an employee. There are reasons why business owners are taxed differently. They take risks by investing their own money or pledging their own collateral to start the business. Business owners have expenses that their employees do not. They pay for their own health plan and CPP benefits and are generally not entitled to EI benefits. They also pay for their employees to have access to these same benefits.

The document also implies that only the wealthiest Canadians are affected by the proposed changes. This is simply not the case. A Chamber member tax specialist estimates that between 80-90 per cent of their small business clients will be impacted by these changes.

To begin, government wants to increase the tax rate on the money a business has earned and saved. When a business has a successful year, they have the option to save extra revenue and invest it in their business to earn “passive” income. To business owners, this money is an emergency fund that can carry them through an economic downturn. These reserves, and the income they generate may be used to pay employees wages when business is slow. They may also be used to help expand business operations in the future.

Currently, these savings are taxed at a rate of approximately 55 per cent. The proposed changes could see this rate increase as high as 75 per cent. The rules would apply to all incorporated businesses in Canada – large and small. By raising these taxes, government punishes entrepreneurs for reinvesting their own money to help grow their business and the economy.

The document also unfairly paints family-run businesses in a negative light. Business owners must prove the amount of time a family member puts into the business is reasonable compared to their payment received. Not only does this create unnecessary and costly administrative hurdles, it devalues the risk that all family members invest in the business. Entrepreneurs put their life savings at risk, and consequently, so do their spouses and children.

If these changes take effect, small business owners earning $50,000 a year, who split their income with their spouse, will pay $225 more a month in income taxes. This is a 27 per cent income tax increase.

Finally, the proposed changes penalize entrepreneurs who want to sell their business and retire. Many business owners plan their retirement around selling their business. In certain cases, the current proposal will see taxes on the sale of businesses double or triple. This will result in a huge loss of funds intended to support business owners and their families during retirement years.

These changes will effectively punish local businesses and discourage entrepreneurship. The proposals follow other recent changes such as cancelling plans to reduce the small business tax rate and tightening rules on partnerships, a new carbon tax and increased CPP premiums.

We encourage all Island business owners to contact their financial representatives and find out how these changes could impact their business, their family and ultimately their future. We urge you to share your concerns with the federal Department of Finance and your local Member of Parliament prior to the Oct. 2 consultation deadline.

P.E.I.’s four MPs have the power to stand up for Island business. As a Chamber, we call on them, with their colleagues, to stop these tax changes that discourage economic growth and punish our hard-working business owners and their families.