Hugh Mackenzie
Huntsville Doppler
Small Businesses should not be the Scapegoat for Government Spending
Well, I didn’t see this one coming. Prime Minister Justin Trudeau and his government sticking it to the middle class. Who wudda thunk it? After all, during the last federal election he spent much of his campaign defending the so called middle class. But stick it to them, especially small business owners, is exactly what he is going to do with the changes to the Income Tax Act proposed by Finance Minister Bill Morneau and supported by Justin Trudeau.
Small business owners represent almost half of the employers in Canada. They are farmers and shopkeepers, physicians, accountants, contractors and entrepreneurs. For the most part, they are risk takers without a safety net and with no indexed pensions or government assistance to fall back on. They employ a huge portion of the national workforce. Many are constantly in hock to the bank, in order to support their business and the people they employ. If you think this is not a local issue, simply walk down Main Street in Huntsville or any other main street in small-town Canada, and you will see who will be affected.
The Government suggests this is merely a “Fairness Tax”. It is not. The implication is that small business owners are cheating the tax system or are greedy. They are not. All taxpayers take advantage of whatever exemptions are available to them lawfully. It would be a very rare individual who did not. Tax incentives for small business operators are there for a reason; to support those who risk what they have, to advance our economy and provide employment. They are not handouts. We should celebrate small business owners who are successful at what they accomplish, not penalize them.
Prime Minister Trudeau promised to reform the Tax code in Canada as part of his election campaign. There is no question that our tax system is riddled with so called ‘loopholes’. Some of them are there for a reason and some need to be repealed. Fair enough. But why start with the middle class? They are, after all, a very large part of the engine that keeps this country running.
When I think of the middle class and small business owners, I think of people like Dino and Bessie Georgas. Dino and Bessie owned Family Place Restaurant in Huntsville. After a long and successful career, they have just sold their business. They came to Huntsville about 40 years ago from Greece. Dino started work here as a dish washer. Through hard work and sheer determination over the years, Dino and Bessie purchased their own business, now in a mini plaza which they also own. Through the years they have never been too busy to give back to the community in so many ways, only one of which is an annual Christmas lunch to which the entire community is invited, with all proceeds, every cent, going to the Salvation Army Food and Toy Drive. Dino and Bessie have put their heart and soul into Huntsville and deserve a long and happy retirement.
I also think of Tracy and Randy Robinson, who coincidently, also retire this month. After years as entrepreneurs, they became operators of Robinson’s Independent Grocers. They too have contributed in countless ways, to the Huntsville community over their 21 years here, from offering space and supplies for the weekly charity bbq’s to sponsoring a charity ball tournament and countless sporting teams, to saying yes to almost every request for a donation. They have also provided employment for hundreds of people and worked hard to grow a very successful business.
Then at the other end of the spectrum, are Jenny Spring and Oliver Wolfe. These young people operate The Spring Farm and have also just purchased The Family Place Restaurant. As Jenny Spring said, “The hardest industries out there are farming and food. So here we are, we are doing them both now”.
People like these, who operate small businesses, are the target of the Trudeau Government’s proposed tax legislation. It has been described as a ‘merciless tax grab’. Even many Liberals are denouncing it. John Collins, in a letter to the Toronto Star noted, “that small business has created the Bulk of jobs in Ontario”. This is likely true for the rest of Canada as well, most especially for non- urban communities like Huntsville. Collins went on to say, “Taking more money out of these businesses will reduce future job creation. We need more jobs and fewer taxes”.
One simple alternative to this attack on the middle class and small business would be for the Government to sharply reduce its spending. A $10 billion deficit for each of the next three years, promised by the Trudeau government, has quickly ballooned to $30 billion in the first year alone. Of course, it will be a cold day in Hell before they curtail spending, so the Government will need more money. It is a mistake however to take it from the very people who stimulate our economy. Read the polls Mr. Trudeau. Even your supporters are against you on this one.
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Do tell us, Beloved Former Mayor, which of the highly-abused loopholes identified in the Finance Department’s consultation paper do you defend: the sprinkling of income among family members, the converting of income into capital gains, or the ability to shelter passive investments from tax indefinitely ? Or are you defending all three?
I take it you’re unmoved by the fact that a professional making $300,000 a year can pay less tax than a nurse making $45,000.
Your suggestion that the consultation paper constitutes an attack on small business generally is specious. But it has, predictably, provided red meat for your conservative running-dogs.
Hugh
A very well written, accurate article regarding the devastating result of Trudeau’s proposed tax legislation on Canadian small businesses. It is both appalling and frightening that so many complacent, uniformed Canadians are still taken in by this man who manipulated his way into a position of power. They do not question and continue to listen to the news presented by a leftist, socialistic media with no integrity that continually promote him. This part of the Canadian electorate, by refusing to acknowledge the damage that Justin Trudeau LIBERAL prime minister is inflicting on our country, put our country at huge risk.
Of course a prime minister that sees Canada as a post-nation state and doesn’t really think there’s such a thing as a Canadian identity any more will have no conscience about inflicting hardships on private business owners . Trudeau disceptively presents a moderate image when in reality he has a radical agenda. He truly believes the idea of nation-states is outdated and must be replaced. He truly believes he should serve an international agenda rather than the Canadian people. He acts in ways that damage and weaken our national strength and national sovereignty.
All small business owners should recognize that these proposals are an attack on them personally.
The Finance department and the Federal Liberals are incorrectly casting small business owners as wealthy tax cheats. These proposals will cost jobs for people in small business, financial services and health care. They will also reduce the incentive for corporate charity. It is clear that these proposals send a message that this government is all about taxation and greed.
The letter to Bill Morneau from Gordon Lee, CA CPAManaging PartnerYale & Partners LLP is very informative. He states-
I have never in my 30 year career, written a letter to protest proposals introduced by any government. Our firm has worked with small businesses and non-profit enterprises for over 60 years. We are so saddened that a government in this great country believes that these proposals will better this country. Small business owners are some of the hardest working individuals because their business is so personal for them. These proposals are so egregious and misdirected that they will significantly impair Canada economically.
(Img) Trudeau’s Proposed Tax Changes Devastating for Small Businesses – A letter to the Department of Finance from Yale and Partners Toronto Accountants
Letter Transcript:
Issued from the office of Yale & Partners LLP, Chartered Professional Accountants, Chartered Accountants, Toronto
August 16, 2017
Rt. Honourable Bill Morneau,
Honourable Andrew Scheer,
Department of Finance
Re: Tax Planning Using Private Corporations
On July 18th the Department of Finance issued the above referenced document as a proposed measure for consultation. I have been in practice working with small owner managed businesses for over 30 years. Small business is the life blood of the Canadian economy. Statistically small businesses that employ less than 300 people provide more than 50% of the jobs in this country.
I have read a lot of articles on this proposal. I am struck by the misconceptions both of the Finance department and by a number of writers. This proposal is not aimed at the wealthiest Canadians at all. If you have a holding company with $20 million or more in investments then these proposals do not affect you at all. Those companies can elect to be passive investment holding companies and there is no change to their circumstances. If you are a small business trying to earn active business income of $200,000 or less with several employees then this proposal affects you profoundly. These proposals will affect whether businesses carry on, they will affect decisions that small business owners make, and they will affect how small businesses will behave.
It is also important to understand tone. The tone of these proposals is completely misguided. Private corporations definitely pay their fair share of taxes. The implications that they do not, as implied by this document, is just not accurate. It also sends the wrong message to the world about Canada and misleads the general public about the true nature of the circumstances.
That is why it is important to note the fallacies that have been accepted in this document and examine the consequences that these proposals will have:
FALLACIES
The first fallacy is that this is an attack on the rich. If this were an accurate document, Finance would document that the very richest Canadians, just like Bill Morneau and Justin Trudeau, who have holding companies that no longer have active business income, will not be affected. As I stated before, these holding companies can simply declare that they are now just holding passive investments and nothing in their world changes. It should be noted that holding companies pay taxes on investment income at 50%, this is not the tremendous tax dodge that many uninformed Canadians believe to be so.
The second fallacy is the indication that corporations are being formed solely for tax reasons. That is absolutely not the case. In fact all three levels of governments are reducing the number of employees that they have and turning to outside consultants. This is also true for large public companies. These entities force consultants to be incorporated. In the litigious environment that exists around the world corporations provide legitimate credit protection for entrepreneurs. A corporation is also a better vehicle from a marketing and banking and service provider standard. A corporation actually costs significantly more than a proprietorship to form and to operate. So a decision to incorporate is not made lightly.
The third fallacy is that sprinkling income (dividend and salary) is a serious issue. The truth of the matter in most small businesses a spouse is already very involved in the business, be it on a record keeping basis or on a consulting basis as well as with dealing with customers. Any employment income earned by the spouse has always been tested for reasonability for over 30 years. Sprinkling income to children under 18 is already dealt with and has been for over 20 years. Once a child reaches full time employment the advantages of “sprinkling” have very limited tax savings. The vast majority of this proposal is pure posturing.
The fourth fallacy is the comparison of a small business owner to that of an employee to document unfairness. Employees have health care, severance pay, pensions and employment insurance. None of those factors have been considered in the evaluation performed by the Finance Department. In the example used by Finance, Jonah and Susan both earn $220,000. Finance documents that Jonah dividends amounts to his children. The tax rules on this are very specific if the money does not stay with the children then it will be attributed back to Jonah and he will have to pay tax on that amount. The tax savings mentioned by the Finance department total a $35,000 advantage for Jonah. If we compare apples to apples the following additional considerations should be made: The severance that Susan accumulated each year amounts to about $13,000, the health care costs which Jonah must bear will be about $8,000 per year for the family to be equivalent to Susan. The tax preparation and record keeping requirements as well as the quarterly HST filings will result in average additional administrative costs of $6,000. If we add the employer portion of CPP and a 5% employer contribution to a pension plan for Susan, there is no savings at all for an independent consultant.
The fifth fallacy is that holding passive income in a corporation is a bad thing and that a massive sum of money is being shielded. The truth of the matter is that most small businesses do not earn over $250,000 annually. This proposal wants to tax income left in a corporation at 73% (according to a number of tax professionals) no matter what the size of the business be it a profit of $100,000 or $10,000,000 the penalty tax is the same. There is nothing about fairness in this proposal. This proposal has no consideration of the importance of diversification. Large corporations can diversify to different markets and into different product lines. That is simply not feasible for a company that has 15 employees. Their diversity is in accumulating investments to backstop the business from economic difficulty or sudden calamitous events. In 2008 in Ontario and British Columbia, or 2015 in Alberta, small businesses that diversified made a great decision that saved jobs. Entrepreneurs make smart decisions to diversify when times are good to ensure that they will survive when things go poorly. In the both of the examples of 2008 and 2015 small businesses could not count on government or banks to help them in tough times. Small business in bad times need funds to tide them over. They are not like public corporations that get government bailouts. In our Practice alone this saved hundreds of jobs for our entrepreneurial clients in 2009 so that they could be ready to pick up the pieces when the economy recovered. If an entrepreneur ever takes the money out for personal purposes then the taxes paid will be fully integrated as if they were employees. As stated before, investment income within a corporation is taxed at 50% so this new income will not have a beneficial rate. The ability to accumulate income in a business also aids in the transition of the business. Many small corporations have no ability to be sold given the nature of the business or the business could just be the entrepreneur. This proposal inhibits the ability of these people to retire and is all about Finance and the Liberal desire to front end collection with no regard for future consequences.
The final fallacy is that the conversion of a private corporation’s income into capital gains is an extensively used method to avoid taxes. Finance proposes to more than double the tax to 59%. The example given talks about selling an asset to another related company controlled by the same person. The fallacy is that it is a common issue, the problem is the solution to this specific instance. In this circumstance Finance is basically taking a sledge hammer when only a scalpel is needed. This proposal will have far reaching consequences vastly greater than the small issue they are intending to address. This will limit the ability of small businesses to continue, be it through the transfer of the business to children, or to employees. The example problem cited by the Finance department is a very specific technique that has very limited applicability in general circumstances. In contrast, the proposed solution has widespread issues and will have a very detrimental effect on business transition.
CONSEQUENCES
The first consequence is that of competitiveness. The proposal spends three pages documenting Canada’s relative competitiveness. These proposals take an already shaky comparison and make Canada very uncompetitive. In the UK and the US investment income earned by a small business is taxed at 19%. In fact, in the US, that rate is the total tax in the hands of the entrepreneur. In Canada, Finance only looks at the income in the company. When you factor in a proposed 73% tax on investment income Canada is the WORST among the seven countries in the chart. Finance has noted that the fastest growth in the economy is in the service industry. That includes the “Tech” industry. This industry is the most mobile industry in the world. When Canada is not competitive, businesses look for better operating environments. These proposals when factored in combination with the highest tax personal tax rates in the G7 will cost jobs. It should be noted the US announced changes to their immigration policies to target skilled people for immigration. Other countries are doing the same thing. Canada is pushing small business jobs away.
The second consequence is that “sprinkling” will not stop, it will just change. In the example cited, Jonah will employ his wife to help him deal with the incredibly complex new rules that finance has just introduced. The 19 and 21 year old children will be given summer jobs. For the wealthy people, like Bill Morneau and Justin Trudeau, it took me about 15 minutes to figure out a way around the “sprinkling” problem that Finance is so concerned about. I am sure that those individuals, with their advisors, can continue to “sprinkle” without any second thoughts.
The third consequence is aggressive tax planning. These proposals make it worth it for the small business owner to engage professionals to defeat taxes where the government gets more income with no risk than the taxpayer. If enacted, there will be many decisions made to take steps to counter the effect of these proposals as much as possible.
The fourth consequence, which goes hand in hand with the third consequence, is a growth in the underground economy. High tax countries have always had tremendous problems with unreported amounts. These proposals are creating just such a situation in Canada. Finance does not report in their tables that Canada has a significantly larger underground economy than the UK or the US. This is not a function of honesty this is function of implied fairness. Even right now, high tax employees are very eager to get forms of compensation that are not taxable. This will be multiplied significantly for small business owners. This is not an environment which this country should be proud of.
The fifth consequence will be a direct result of passive income in a corporation. If you cannot relocate out of Canada, then you will take different steps to avoid a 73% tax. If entrepreneurs do not diversify then downturns will hit the Canadian economy more severely. If they do diversify then the entrepreneur will likely keep the money as cash rather than invest it to pay a 73% tax. This will result in a decrease in revenue for Canadian Governments which would have got 50% on any investment income the company earned. This will also result in less income for our financial services industry and advisors who also pay taxes. In the alternative, entrepreneurs will try to invest excess income in investment products that
provide a return of capital as a distribution or have long term results. The goal will be to wait out a government that is obviously so greedy and short sighted. For large private corporations this tax is even easier to avoid, I am confident that their professional advisors have the same ideas that I have to avoid this tax.
The sixth consequence is charitable organizations. In this time of increased reliance on charitable organizations to provide social services, this document makes it unattractive for wealthy people to donate shares to charity from their holding companies. This has been a huge part of charitable revenue over the last 20 years. This will impair the ability of charities to raise funds for necessary social services to aid communities all across Canada. In our Practice alone several planned foundations have been put on hold or there is a plan to wind them up in the last month.
The seventh consequence is health care. In this country, there is a struggle to attract good doctors. In all provinces, payments to health care specialists is capped. To equalize and to incent medical doctors, they were allowed to incorporate. These proposals increase taxes on the very professionals needed in Canada. These professionals are very mobile. The specialists will leave. This will make wait times that much longer and service that much poorer. Remote parts of Canada will have that much more difficulty attracting doctors to their community.
The final consequence is the continuity of small businesses. These proposals make it very hard for businesses to do any succession planning. A small business owner under these proposals is rewarded for selling to a large corporation. The punitive elements of these proposals mean that small businesses will not be continued on. These proposals basically state that Finance does not want businesses to continue to a new generation. This is extremely detrimental to jobs and to the economy. Large businesses and foreign entities will be glad to scoop up these small businesses which is yet another export of jobs or an elimination of jobs upon amalgamation.
CONCLUSION
I have never in my 30 year career, written a letter to protest proposals introduced by any government. Our firm has worked with small businesses and non-profit enterprises for over 60 years. We are so saddened that a government in this great country believes that these proposals will better this country. Small business owners are some of the hardest working individuals because their business is so personal for them. These proposals are so egregious and misdirected that they will significantly impair Canada economically.
In this document, the Liberal government, takes great pride in the competitiveness of Canada from a corporate standpoint. It is important to note that all of these competitive policies, they take pride in, were introduced by the Conservative government. The Liberal government has only introduced measures to make corporate Canada less competitive.
All small business owners should recognize that these proposals are an attack on them personally. The Finance department and the Federal Liberals are incorrectly casting small business owners as wealthy tax cheats. These proposals will cost jobs for people in small business, financial services and health care. They will also reduce the incentive for corporate charity. It is clear that these proposals send a message that this government is all about taxation and greed.
The passage of these proposals will have far reaching implications and will definitely demonstrate that this government is bad for the economy and for jobs.
Yours truly
On behalf of all of the partners,
Gordon Lee, CA CPA
Managing Partner
Yale & Partners LLP
Only affects Inc. earning over $150,000. Biased article.
All governments should make a serious attempt to rein in spending. Start with the District and local municipal levels and then run upward all the way. They are all in the same situation. The taxes are all too high for our countryside’s good and user fees piled on top of the taxation only make things worse.
For those of my Liberal friends who believe my Listen Up! column is just a Conservative rant, I urge you to read this article by Warren Kinsella, a highly respected and connected Liberal surrogate.You can access it at warrenkinsella.com/2017/09/this-weeks-column-an-open-letter-to-messers-trudeau-and-moneau.
Hugh, great article, very well written with reasoned explanations. You have certainly stirred up a hornet’s nest of opposition. Nice to see so many Liberal advocates following you on Doppler.
So interesting to see “non-choir members” responding to your misleading criticism. The Liberal Party of Canada was founded by small business people fighting against the Family Compact manipulation that big, powerful Tories wielded in the nineteenth century. This is a familiar echo. Support the wealthy and gain from trickle down. The failure of Thatcherism and Reaganomics has only proved that this is a flawed theory. We need a new and fair approach to taxation to achieve a reasonable balance. World billionaires, like Buffet, Gates and Bloomberg have been outspoken about the pressing need to rebalance taxation . At least this Liberal government is being honest in its attempt to do so.
The loophole being closed cannot be used by anyone who is an employee. It can only be used by people that are able to have their income go through a corporation they control. So, for example, doctors can incorporate themselves, and then move portions of their salary to other family members in order to reduce tax.
Are you saying this sounds fair to you.?
Not if you think people should be treated equally. Everyone should be able to do it, or no one. The Liberals have chosen ‘no one’.
A valid critique from my point of view, is they should also eliminate the capital gains exemption. It is another loophole the rich use to reduce taxes, that employees cannot use, unless they can save enough money to make capital gains. Currently, we understand that half of Canadians live paycheck to paycheck, making capital gains an unlikely option.
-interesting discussion
-if it is affecting only those who’s income is $150,000.00 or greater, then maybe it’s not as bad as it appears.
-many in the general public, have little comprehension of what it takes to start and operate a successful business, so articles that illustrate this would help people understand.
-one fact that is seldom talked about, is the number of hours per day and how many days per week, a small business owner works, in order to achieve their income.
-it would be useful to give a monetary value to employees benefits (i.e. pension, extended health coverage, paid vacation, etc.) and make that part of their total income when discussing what is fair in our society
Since criticism of government policy by Conservatives is so “distasteful”, I wonder if it would be more palatable if it came from another viewpoint? Say, by a long time Liberal war room strategist who worked for Jean Chretien and Dalton McGuinty? Cause boy oh boy, this guy sure isn’t very happy about the tax changes either…
http://warrenkinsella.com/2017/09/this-weeks-column-an-open-letter-to-messrs-trudeau-and-morneau/
Thank you Andrew MacDonald for stating what I was thinking! I get so tired of Liberal bashing by our well known area Conservatives! Try being positive for a change. It could be worse. We could be stuck with “a Trump type” !!!
I work for a small business in this community and more specifically as a controller and have previously worked in public accounting. That is to say I am very familiar with tax regulations and how tax accountants do their best to legally reduce the tax burden of corporations. So your recent Op Ed was disingenuous to what the Libreral government is proposing. Are the people who run small business bad people? Of course not, are they legally taking advantage of the rules? Absolutely, but that doesn’t mean it shouldn’t change. The median income in our community is $28k as per the 2011 census and of the 15k people in Huntsville above the age of 15, 280 reported income over $125k. This is all to say that these loopholes that are being closed effect only people making $150k so in Huntsville that’s less than 250 people. So while it is much easier to sell your article as “Liberals attack the middle class” most people in our community don’t have a private corporation and don’t benefit from it. You often discuss the possible closure of our local hospital as terrible for our community and I would agree, where do you believe the money comes from to run these services? I totally agree there are wastes in government and look no further than civil servants pension plans but this is not one of those opportunities to decry big government. This article smacks of a biased and frankly inaccurate representation of the situation. I found this discussion misleading and distasteful.
Omar ” The Wealthy ” Kadr has more money than the vast majority of hard-working small businessmen in this Country. Perhaps Mr. Selfie can come up with a tax grab/scheme to get some of that taxpayer money back where it belongs ,in the pockets of the workers !
Excellent article Hugh.
This lightweight PM is so out of touch with reality. He smiles and bankrupts the country simultaneously. What a shame we have this mishap for a ” Leader ” !
Our business has been going in Huntsville since 1976, in those 41 years we have always employed people, paid decent wages, paid CPP, EI, WSIB, payroll taxes, collected GST then HST and remitted all of these on a timely basis regardless of how the business environment was at any time over those many years. Now our prime minister is insinuating that people like us are tax cheats, what an insult.
Best yet!!!