Proposed Tax Reform will Negatively Impact Small Business

Historically, Canada has owned a strong advantage versus other jurisdictions for its simple and elegant tax code. Unfortunately, we may be losing this advantage. The proposed tax reform is creating complexity and uncertainty that will have the unintended consequence of increased debt, under-investment, loss of risk-taking, brain-drain and downward pressure on hiring and wages.

Last month, Finance Minister Bill Morneau proposed a series of tax changes that seek to eliminate or restrict ways that business owners can save on taxes. The three main issues identified include sprinkling income with family members, saving passive investment income in a corporation, and converting a corporation’s income into capital gains. These changes will have a direct negative impact on small and medium businesses, setting off a chain reaction of unintended consequences.

According to the government, these changes have been set out to improve the fairness of the tax system through measures to prevent underground economic activity, tax evasion, and aggressive tax avoidance. This comes on the heels of other measures including canceled reductions in the small business tax rate, tightened rules on partnerships and started taxing work in progress. That’s on top of new carbon taxes, raised CPP premiums and increased EI rates and results in the most radical tax overhaul in 50 years.

The government says that the tax changes are proposed to prevent business owners from evading taxes and taking advantage of loopholes. Statements such as this vilify business owners. To support their claim, they point out one fact – that business owners pay less income tax due to sharing the earnings amongst their family. What they fail to mention are the many benefits that employees receive and business owners do not. The value of these benefits heavily outweighs the amount they pay in taxes. Business owners, not only take a personal financial risk by launching and running a business, they’re also left with extreme uncertainty, their income is never guaranteed, hours worked vary from week to week, and they lack job security. In addition, business owners do not receive EI, CPP, paid holidays, maternity/paternity leave, bereavement leave, extended health, dental, or insurance, employer matching retirement program, or statutory holiday. In addition, there are a multitude of employee expenses that business owners must endure.

Beyond all of this, if the owner has employees, s/he is responsible for covering 58% of their EI, 50% of their CPP, and provincial labour requirements. It is impossible for the government to analyze the tax break of business owners to employees as their earnings and benefits are not comparable. The current tax regime allows businesses with dry cycles to remain afloat. The current allowance for tax deferral by investing excess cash during peak sales times enables small businesses to draw on that resource during the down cycles. It is imperative that entrepreneurs continue to have the ability to accumulate and invest after-tax resources so they can maintain their business during an economic downturn or to invest in new opportunities to grow their business and hire an expanding work force.

What is missing from the government’s reasoning is the concept of risk taking. What happens to our society when our best and brightest find a more welcoming environment elsewhere or choose to work less because the incentive to work harder is gone? For example, we already face a plight in the healthcare industry with long waitlists for tests and surgeries along with the diculty to find a general practitioner. This is due to the current brain-drain, if these proposed business tax changes go through, we will see a huge increase in our doctors heading down south for work. Thus, increasing the bottleneck in our medical system.

Statistics Canada reported in 2015 that the private sector employed over 11.6 million Canadians, in which 10.5 million of these jobs directly attributed to small and medium sized
businesses. As the backbone of our country, their success is essential to grow strong communities. As such, chamber’s across Canada, including the Tri-Cities Chamber of Commerce
are working together to voice the negative impacts these tax changes will have on small and medium businesses. Help us make a difference and submit a letter to your local MP.

Summary Overview

Template Letter on Tax Reform

Michael Hind, CEO
Tri-Cities Chamber of Commerce