Tax reform suggestions
Re: Morneau gets an earful at town hall, Sept. 30 The debate about the federal government’s plan to reduce the right of professionals to i ncorporate as “small businesses” has largely descended into a nasty argument about the well- to- do taking unfair advantage of the tax system to pay less than their fair share of Canada’s tax burden.
This emotional argument largely misses the point. Those of us who remember when the “small business deduction” was first introduced into the tax system ( after the 1968 tax reform program became law) will remember that this “loophole” could only be applied to the first $50,000 of active business income, a far cry from the present $ 500,000 l i mit. This l i mit was i ncreased every f ew years until it reached the current $ 500,000 amount some years ago.
Since 2001, professional corporations have been permitted in Ontario and most provinces. These corporations have enabled professionals to obtain the benefits of the small business tax rate for their net income up to the $ 500,000 limit. It is this amount which is unfair, compared with salaried taxpayers who are required to pay the higher graduated personal tax rates.
Equally important is the opportunity of professionals to incorporate management companies to operate their professional practices. These corporations are often owned by the professional and his/ her spouse and children.
Rather than the roughshod approach which the government is proposing, this unfairness can be remedied by making two simple changes to the tax law:
1. Allow professional corporations to continue to be taxed as small businesses, but only up to a maximum of $ 50,000 per year. Any net income in excess of this amount would be taxed at full corporate tax rates.
2. Closely held corporations which manage the office of a professional would have their annual net income taxed as small businesses up to a limit of five per cent of the gross billings of the professional in that year ( a reasonable management fee). All net income in excess of this amount would be taxed at full corporate tax rates.
In this way, family farms and other legitimate small businesses could continue to have their net incomes taxed at the small business tax rate, up to any limit which the government considers to be fair and reasonable. Saul Paton, Toronto