“No, the sky is not falling on Canada’s small businesses…The minister’s proposals would clearly increase tax fairness.” (Professor Michael Wolfson, Globe and Mail, August 29th, 2017)
Sorry, but that’s BULL
With apologizies for my bluntness but the quote from Professor Wolfson, whose research was instrumental in the government’s proposed small business tax changes, could not be further from the truth.
The Department of Finance has proposed three changes to the way small business will be taxed. Before we talk about the changes, let’s look at a typical small business our firm services;
We have a client who has been operating since 1997. This company did not make profit for the first 15 years of it’s existence. There were many months where the employees made more money than the shareholders. Some years the combined salaries for the married shareholders was $40,000. The shareholders mortgaged their home to keep the business afloat, their were no pension plans, no medical benefits, no vacations (paid or otherwise), no parental leaves etc.
Thankfully, through hard work, the last few years have been profitable. This company now employs 23 non family members at generous wages/benefits and there has been some cash to put aside and invest. This excess cash is needed for any slow times in the future. There will be a down cycle, there always is. Hopefully, this invested amount will grow and possibly provide for the shareholders an amount for some sort of retirement in the future.
This will not happen if these changes go through. One would have to ask….why bother?
TAXATION OF FAMILY HELD SHARES or DIVIDEND SPRINKLING
The Government proposes to more than double the tax on dividends family shareholders deemed to have not “reasonably contributed” to the operating of the business.
Who at CRA is going to decide this? How will they audit this? Do companies now have to keep records of family “contributions”? This would be confusing and very costly.
The Finance Department is arrogant and ill advised if it thinks that it can decide what value a family member brings to the company. In more than 90% of the small businesses we service at our firm all family members sacrifice for the benefit of the business.
While this affects all small family business, one group that will be hit harder than probably most are doctors.
Many years ago, the OMA signed an agreement with the Province of Ontario that in return for lower expectation of fees, doctors may incorporate and have non-medical adult family members as shareholders. There is no doubt that there is a tax savings in dividends to these family members but remember doctors are small businesses so items like office rent, supplies, office staff, utilities etc are all paid by the doctor and not the government.
Probably the most damaging proposal is the change to the taxation of Passive Income.
Passive Income is the income derived from excess cash that is invested in revenue streams that are not the main focus of the company’s business activity. Examples are dividends and interest from portfolio investments, rent from tenants in a building the corporation might own.
This cash provides a cushion for any lean times as well as hopefully providing a pension for the shareholder down the road.
The proposed changes increases the tax rate from 50% to 73%.
Yes, you heard that right the combined tax rate for this type of income will become 73%. This is tax fairness?
The majority of our clientile have stories like the one described above yet the Finance Department provides a narrative of greedy and rich business people not paying their fair share of taxes.
Again, as above, BULL
With all due respect to Professor Wolfson, as well as the dedicated bureaucrats at Finance, they may have studied small business, but through our hundreds of clients for the last 30 years, we have witnessed and lived the struggles and challenges of small businesses.
So what do you do?
If you own a small business, please contact your tax professional and make sure you understand the proposed changes and how it could affect you.
Most importantly, the government has given until October 2nd of this year for submissions and comments. Please contact your closest Liberal MP and state your fear and objections to these damaging proposals.
It’s not too late!
Vito Sgro is a CPA/CA with the accounting firm of CBM CHARTERED ACCOUNTANTS LLP in Hamilton. He has been in public practise for 27 years