Tax changes not welcome

Ottawa’s proposals could hamper innovation, investment, tech CEOs say

ALEKSANDRA SAGAN

Canada’s tech community, including the head of one of the country’s best-known firms, is starting to join a growing group grumbling about Ottawa’s proposed changes to small business taxes. They say the plan could stifle investment and hamper innovation in a country trying to poise itself as an entrepreneurial hotbed.

“I would encourage the government to look very closely because ... it is causing a lot of concern to business owners,” Ryan Holmes, CEO of social media management platform Hootsuite, said in an interview at the Cascadia Innovation Corridor Conference in Seattle. In mid-July, the federal government released a three-pronged plan to end several tax provisions used by some small businesses.

One provision at risk of being eliminated is income sprinkling, a practice that permits business owners to lower their taxes by passing income to family members, even those not active in the business, who are in lower tax brackets.

The government is also proposing limits on the use of private corporations as a way to gain tax advantages when making passive investments, and limiting the conversion of a corporation’s regular income into capital gains that are typically taxed at a lower rate.

Smaller tech companies have created their own structures — much like doctors, lawyers and other small business owners, who have also rallied against the changes — that provide the ability for them to have a different income stream or different way to flow income, said Bill Tam, CEO of The BC Tech Association.

For these companies, the proposal creates an additional worry around taxation, he said, adding he’s heard concerns from a few of the group’s 540 members.

The association has encouraged its members to support the Greater Vancouver Board of Trade’s effort to lobby the government to reconsider the changes, he said.

Limiting income splitting will impact compensation for otherwise uninvolved family members who share in the business risk, as well as entrepreneurs’ retirement planning, according to the local board of trade’s website.

Meanwhile, the higher tax rate on passive investments will reduce the funds available for such purposes and limit entrepreneurial reinvestment, the board claims.

All streams of funding for entrepreneurs, including personal savings, family support, and angel and institutional investors, are at risk, said Jade Bourelle, CEO and co-founder of Talemetry, a Richmond, B.C.-based recruitment firm that uses smart technology.

Budding business people will find themselves in a position where they will have to give up a greater share of equity in their companies in exchange for funds, and will pay higher taxes if they ever sell the company, he said.