WEIGHING PLANNED CHANGES TO THE TAX CODE

You are to be forgiven if you are among those scratching their heads as they try to interpret the rhetoric on both sides of the current debate over the Federal Government’s planned changes to the tax code.

As is usual in such cases, the arguments quickly retreat to the extremes, which only serves to make a reasoned assessment that much more difficult. On the one hand you have the political agents of the government protesting the changes are designed to stamp out “loopholes,” to extract a fair share from the rich and that small business in Canada has nothing to fear. On the other, this is doomsday and the falling of the sky is imminent.

First, it is entirely appropriate the Tax Code and it’s biblical-like proportions should be reviewed and amended. The economy is changing and along with that, new forms of wealth are being created. And rules can often have unintended consequences, some of which take years to become apparent. And it is further reasonable to assume any changes may well impact some sectors of the economy or some income earners within it, in a negative way. It is government’s responsibility to stamp out excesses and flagrant abuse, but to do so in a manner which preserves the integrity of the system, and in their own words is “fair” in its outcomes.

In this context one can imagine amending the rules around income sprinkling are not unreasonable. I am sure other changes being proposed fall into that same category.

However, consider the following three examples of how some changes will impact certain sectors:

1). The start-up community in Canada, of which we are so proud, and is so important to introducing new technologies and ensuring we are globally competitive most often gets its early stage or first round of financing from “friends and family.” This funding is usually modest in scope but enormously important in its impact. Without it, entrepreneurs would have no ability to fund early development work. Under the new rules, gains made by family members who invested in helping get the business started would be taxed at the highest marginal rate. This is more than twice the rate that same individual would pay in the event they invested in any public company. Think about it, the impact is bizarre. Beyond the tax and incentive impact is the concern the category of “friends” will no longer have the comfort of family investment. It’s the catalyst of family support which most often brings friends into the circle.

2) As young companies grow, their need for further financial support grows in tandem. An important source of such capital often comes from entrepreneurs who themselves have built and exited successful companies. These entrepreneurs found investment holding companies from which they provide such funding. And it’s not just their financial support which is important, it’s the advice, experiences and mentorship that come with it. Under the new rules investment holding companies will be taxed at punitive rates, thereby discouraging their formation and their activity.

3) Doctors use a variety of techniques to defer income, such that it is taxed upon retirement. Under the new rules various tax experts have forecast that doctors will have from 30- to 50-per-cent less retirement capital. One can now appreciate why docs are so upset at their perception they are being targeted and unfairly so.

So here is my point – change is warranted. But the impact of change needs to be carefully considered. I doubt very much the Finance Department intends to do anything to compromise the fund-raising opportunities of our entrepreneurial sector. These impacts fall under the umbrella of unintended consequences.

So what should the government do? In a word, slow down. Listen to those tax experts who have considered the impact of the proposed changes in depth. Allow time for more public scrutiny and debate. Don’t make mistakes and be forced into defending them only to correct them later.

I have the highest respect for Minister Bill Morneau. He didn’t need this job, nor to spend his weekends running around the country defending the changes. We are lucky to have a man of his calibre and experience in the position. This shouldn’t be about political partisanship, it should be about good public policy.

It still can be.