Are we really tax cheats?
CMC-Canada recognizes that the concerns raised about the proposed tax changes apply to a good number of our members and felt moved to raise our voice. We have joined the Coalition for Small Business Tax Fairness, a group of approximately thirty associations under the umbrella and through the efforts of the Canadian Federation of Independent Business. Collectively, we have submitted a letter to Finance Minister Bill Morneau urging the federal government to not move forward with their current proposals (read the french version here). As a preferred remedy, we suggest more interaction to develop more focused and effective measures to address the issues.
And here's some additional background on the issue at hand:
In Budget 2017, Finance Minister Bill Morneau promised to look into taxation of small business corporations. As expected, he delivered a consultation paper outlining a proposed series of new tax measures aimed at shutting down tax advantages exploited by some high earners who are shifting income though a corporation and thus lowering their tax bill in comparison to regular wage earners.
What’s the problem?
According to the Department of Finance (and based on their research), the share of income that has been passing through small corporations has doubled since 2002 while the rate of self-employment has held steady. The reasonable conclusion is that the shift is more about tax-planning rather than changes in economic activity.
The major goal of proposed changes is to reduce the effect of a tax provision that, in effect favours one form of economic organizing over another. Tax loopholes should be closed in a way that assures tax fairness while continuing to enable or at least preserve economic efficiency.
Three specific measures have been proposed:
- Reduce income sprinkling (passing income to family members through dividends or other lightly-taxed payments) Draft legislation (as of January 1, 2018)
- Increase taxes on passive investments (investments not related to the business). Not yet draft legislation.
- Clamp down on the use of passing income through multiple corporations to transform regular income into lightly-taxed capital gains. Draft legislation (retroactive to July 18, 2017)
What’s the fuss about?
There are undoubtedly high income earners who may be taking advantage of the tax regime that applies to small businesses. However, a growing number of tax specialists have now had a chance to study the proposed tax provisions and are starting to raise concerns about the impacts on (lower income earning) small business owners. Many of our independent consultants are small business owners and will be affected by these measures.
As a general observation, tax provisions are being used by most small business owners to allow small firms to reinvest tax savings back into their business (recognizing the higher costs of tax compliance for small business owners).
What are the counter arguments?
Some of the reasons why we are uncomfortable with the proposed changes:
Family Income Sprinkling
- When an entrepreneur opens their business, everyone in the family is involved - whether or not they play a direct role in the business. Every member of the family takes on the risks involved in running the business.
- Small business owners do not have access to pensions or the other benefits offered to many salaried workers and so often rely on passive income investments in their business to prepare for their retirement.
- It is difficult for small business owners to access financing and so business often use passive income to save for major investments.
- Passive income serves as insurance against emergencies and unforeseen costs.
On Converting Capital Gains
- Proposed changes could affect business value appreciations from the past, almost a form of retroactive taxation.
- There could be double taxation of some estates.
- It will become more difficult for business owners looking to do intergenerational business transfers.
Are independent management consultants tax cheats? I do not think so – we are trying to fulfill our missions, serve our clients and work within the rules. We don’t think that fixing a problem that is being caused by the actions of a few should be addressed by changing the rules for all. It's just not fair.