The recent proposed changes to federal income tax legislation are being characterized by the federal Department of Finance as a crackdown on the wealthy. Take a closer look at the proposals, and their inevitable impact, and you’ll find a radically different reality.
The accounting community accepts that the current legislation is not perfect and many of us support some of the changes. But we also know that this proposed targeting of small business corporations is less a crackdown on the wealthy, more an attack on middle-class Canadians who have chosen to run businesses that are the economic engines of every community across our country.
These business owners are also the employers of most working Canadians.
According to Statistics Canada, there are 1.17 million employer businesses in Canada and of these, 1.14 million – 98 per cent – are small businesses. More than half are concentrated in Ontario and Quebec (407,175 and 235,075 respectively). A small business, as defined by StatsCan, has from one to 99 employees.
Of the 11.6 million Canadians employed in the private sector, 8.2 million are employed by small businesses. We’re talking family doctors, plumbers, electricians, roofing companies, restaurant owners, landscapers, coffee shops and florists.
These are not champagne-swilling, cigar-smoking plutocrats but hard-working Canadians who have taken on the risks and responsibilities that come with competing in the market place while providing livelihoods for their families and their employees.
Business owners have been allowed to “sprinkle” company income among lower-income spouses and children to reduce the family tax bill. Under a current “kiddie tax” measure, income-sharing with minors to get that tax break is prohibited but along with other changes, the government is now proposing to extend that restriction to the payment of wages and salaries to adult children aged between 18 and 24.
The new proposals would make it incumbent upon the business owner to prove the level at which adult family members contribute to the business. This “reasonableness test” would determine the level of tax the family member pays.
The proposed new measures also include significant changes to capital gains regulations and investment portfolios all designed, in the words of Finance Minister Bill Morneau, to eliminate the tax advantage small-business owners might have over regular salaried employees.
Let’s compare:
Public sector salaried employees – politicians and bureaucrats at all levels of government – do not worry about ending their working life without a pension. Nor do salaried employees with many private enterprises. For many small business owners this is a constant worry.
The small business owner has no guaranteed pension, no guaranteed vacation and no Employment Insurance protection, and, in the early years of an enterprise, often no guaranteed salary.
A small business is a risky business.
These are entrepreneurs and innovators and the economic future of our country, as they always have been and always will be.
The tax considerations – I’m deliberately avoiding the word “advantages” – the Department of Finance seeks to repeal have been recognized by successive governments as necessary incentives to help small businesses succeed.
While the proposed new measures will not necessarily cause the mass collapse of established small businesses, they have the potential of discouraging others from going into business and more immediately of hurting current employees.
With less revenue comes the prospect of layoffs, fewer working hours, and reduced health insurance and other benefits. These are real but perhaps unintended consequences of what the government is proposing.
During the coming weeks, we in the accounting and small business communities will be making the case to members of Parliament that unless there is a re-think of these proposals, many ordinary middle class Canadians in the communities they represent risk being hurt.
Originally featured in the Ottawa Citizen’s online editorial section. Click here to read the full OpEd feature from August 4, 2017.
