Is the corporate tax system fair?

There have already been countless commentaries, written on the Liberals’ proposed tax changes and their attack on Canadian small businesses.

Most of these pieces have argued what is or isn’t fair, but that’s a term that is hard to define.

Everyone’s idea of what constitutes fair is a little different.

I recently had the chance to sit down with a member of the Liberal party, and instead of repeating the comments that he’s already heard many times before, I wanted to show him the facts and the true math behind what they’re proposing.

First, we discussed Prime Minister Justin Trudeau’s claim an employee earning $50,000 pays more taxes than a business owner who earns $300,000.

While every accountant in Canada knows this isn’t the case, apparently Mr. Trudeau is still confused, so let me help.

Fifty thousand dollars of employment income in B.C would see combined federal and provincial income taxes of $7,484, based on an average 15 per cent tax rate.

A small business owner in B.C., who qualifies as a Canadiancontrolled private corporation (CCPC), at the very lowest end, would first pay $39,000 of combined taxes when their corporation earns income of $300,000.

They then have several options on how to pull the money out, such as salary or dividends.

But, if we select the most taxefficient option, which is eligible dividends, the corporation would pay another $52,051 in taxes.

This gives the business owner a total tax bill of $91,051 or 30 per cent.

If the same business owner chose to pull money out as a salary instead, so they could participate in Canada Pension Plan, registered retirement savings plan (RRSP) and all of the other benefits an employee gets, they would have a total tax bill of $131,944 or 44 per cent.

In case you’re wondering, $300,000 of income earned by an employee would generate $112,603 or 37.5 per cent tax.

Either way, the business is definitely paying more tax than the employee earning $50,000 per year.

Second, we talked about the reason why some small business owners can use certain tax deductions.

A typical professional who works as an employee, graduates from university at age 22 and starts paying off their student loans and putting money into their pension and RRSP right away.

A typical small business owner or professional will spend many years in school or struggling to get their business going before eventually turning to profitability.

The average age a business owner or self-employed individual starts putting anything away for themselves is well over 40.

So let’s assume the above employee and business owner both have a goal of having $1 million in their accounts by age 65.

The employee starting to put money away at age 22 would need to put away only $419 per month or a total of $216,505 to reach their goal.

The business owner or professional starting at age 40 would need to sock away $1,446 per month or a total of $433,750 to reach the same goal, based on a six per cent annual rate of return.

I wanted to finish with the question raised at a town hall meeting by a doctor who claimed she couldn’t afford to go on maternity leave.

Trudeau gleefully corrected her by saying she could take full advantage of the $500 per week benefit that she can collect for up to 17 weeks funded by the B.C. Medical Association with the doctor’s own money.

What he failed to comprehend was $500 per week for an employee might be tight, but for a professional with their own practice who may incur $15,000 per month or more of fixed overhead, it just doesn’t work.

That doctor can’t simply stop paying rent, leases on equipment and lay off all of her staff for the 17 weeks.

Small business in Canada employs around 70 per cent of the entire Canadian workforce.

About half of all small businesses fail.

Forget arguing about what is fair and consider what a further increase in taxation to this vital piece of the Canadian economy will do.

The government should be doing everything they can to support entrepreneurs, not force them out of business.

At the end of the day, most Canadians realize this has nothing to do with fairness and is all about the government’s need for more money. The solution is pretty simple. Leave the small business tax rules alone and raise GST by one per cent.

This would be fair because anyone who earns and spends more will pay a little more tax.

Brett Millard is the owner of Speir Wealth Management in Kelowna. Reach him at brett@speirwealth.com.