Experts warn impact of tax changes far-reaching
The first time Charlottetown tax professional Terry Soloman saw the federal government’s proposed business tax changes, he said his reaction was “one of disbelief.”
“It really fundamentally changed the way private corporations are being taxed in Canada. I did not expect that broad of a change to the legislation,” said Soloman, a partner of tax services with the MRSB Group.
On Sept. 26, Soloman spoke before the House of Commons Standing Committee on Finance in Ottawa about the proposed changes.
Soloman said his message to the committee was that the tax changes wouldn’t impact the government’s target of the “one per cent” as much as it will damage businesses making less than $100,000 a year. The smaller businesses could see a 30- to 40-per-cent increase in taxes next year.
“If your goal was to tax that wealthy one per cent, you’re really hitting a mosquito with a sledge hammer. You’re really missing it,” he said.
The federal government announced the proposed tax changes in a consultation paper on July 18. The proposed changes involve income sprinkling among family members in a business, limiting the use of passive income (or investments) and converting business income (salary or dividends) into capital gains.
Soloman said the proposed tax change regarding the use of passive income is the “most egregious.”
He explained that the proposed change would take away the incentive to leave money in a corporation and invest and grow the business because more money is going to income tax.
“It’s just going to mean less economic activity,” he said.
The proposed tax change would also give businesses less money to hire new employees or give pay raises to existing employees.
The third proposed tax change involving converting business income into capital gains would impact businesses wanting to retire and sell to family members. Under the proposed changes, families would pay a lower tax by selling to a third party or corporate entity rather than to a family member.
Jennifer Dunn, a tax partner with BDO Canada, is one of the panellists at the Greater Charlottetown Area Chamber of Commerce’s town hall event being held today at the Delta Prince Edward.
She is also concerned with the proposal involving converting business income into capital gains because it is expected to be retroactive to July 18, and some businesses have already entered into transactions prior to the release of the consultation paper.
“There could be significant negative tax implications,” she said.
When she first read the proposed changes, Dunn was “surprised.”
Also concerning is that even though the changes are said to be in a consultation phase, two of them (income sprinkling and converting income to capital gain) have legislation already drafted, Dunn said.
“That was a strong message to us at BDO – that (the department of finance) already made up their mind that changes are going to happen,” she said. “They may tweak the legislation some, but in two of the three areas, these changes will occur in some respect.”
She agreed that the greater impact will be on middle-class businesses and owners and not on “closing loopholes for the very wealthy” and “ensuring the tax system is fair.”
“What will be surprising to many Canadians is the farreaching nature of these proposals,” Dunn said.
She said some clients across the country are inquiring about taking their businesses “off shore” because of the proposed tax changes. But other implications would be the “trickledown effect” on employees as well as the ability of business owners to donate to charity.
The consultation period on the proposed tax changes ends on Oct. 2.