Small Businesses Insulted by Minister Morneau
July 18, 2017 will live on in infamy as the Federal Government of Canada officially declared war on small businesses. Small businesses form the backbone of the Canadian economy, but Minister Morneau believes they are the scoundrels who “avoid paying their fair share” of tax. I’m I being overly or deliberately inflammatory? Maybe, but I feel this is the only way any of us will be hear by the tone deaf department of Finance.
- Income Sprinkling
- Passive Investment Income
- Converting Income into Capital Gains
- The business owner does not have an “employer paid” health plan
- The business owner does not receive paid vacation
- The business owner has to pay the employee portion of CPP contributions on their income and the employer portion of CPP, resulting in a doubling of the cost
- The business owner does not qualify for EI and therefore can’t take paid maternity of parental leave, and can’t receive any EI income if the business fail
Part B to the Department of Finance’s attack on income sprinkling is focused on the lifetime capital gains exemption for the disposal of qualified small business corporation shares. Under the current system, there are structures available that will allow a family to “multiply” the LCGE by making multiple family members party to the ownership and eventual disposition of the company. The effect is that each family member qualifies for the LCGE, greatly increasing the tax benefit released from the disposal of the company. The Department of Finance has proposed changes to the legislation that will kill the structure.
Passive Investment Income
Under the new proposal, you will be penalized for leaving the money inside your corporation to invest in assets that earn passive income. You will be penalized with a higher tax rate on the income you left in the company and then invested in assets that earn passive income, so that you end up with the same amount of cash as you would if you pulled the money out of the company. The Department of Finance is therefore proposing to kill your retirement plan without any intention to give you one of those cushy tax payer funded defined benefit pension plans.
Converting Income into Capital Gains
Takeway: This only applies to some small business, but if it does then you need to speak with your tax advisor to understand the impact . You may also need to speak with your lawyer and possibly your insurance provider, as many Unanimous Shareholder Agreements contemplate these kinds of transactions combing the use of insurance policies.
“When you have an economy that works for the middle class, you have a country that works for everyone. That’s the spirit in which we are asking Canadians for input into how to close loopholes and address tax planning strategies that give unfair tax advantages. Many of the richest Canadians are unfairly exploiting the tax rules designed to help businesses thrive. We know that businesses, including small businesses, help grow the Canadian economy. These tax advantages are in place to help these businesses reinvest and grow, find new customers, buy new equipment and hire more people. We want to make sure those rules are used to do just that, and not to give unfair tax advantages to certain – often high-income – individuals.”
The vast majority of my clients is part of the “middle class” Minister Morneau purports to work for, but with these proposed changes I strongly disagree with him. The proposed changes will hurt the middle class small business owner much more than the Department of Finance’s disingenuous calculations suggests. The significant increases in the CPP contribution rates over the next decade, the elimination of the multiplication of the small business deduction rate, the minimum wage increases proposed or implemented in many provinces and now these three major proposed changes, it is clear that the Government of Canada has decided to declare war on small business. As Jack Mintz argues in his Financial Post article,
Short of a tax payer revolt, I don’t know what can be done to stop the Department of Finance to implement to proposed changes. I urge all small business owners to speak up and reach out to every advocacy group you can think of to put pressure on the tone deaf Department of Finance to start working with the small business, the backbone of the Canadian economy, to spur growth rather than increasing the tax burden already experienced by all Canadians. Maybe they can start by changing the cushy government pension we all have to fund rather than asking us to pay more than our “fair share”.