By Dan Kelly
Published in the Financial Post October 30, 2017
Back in January, if someone had asked me what the dominant political headline would be for much of 2017, I don’t think I would have responded with “A series of complicated tax changes affecting Canada’s small businesses.”
But for the past four months, the July package of federal tax reforms was a leading story in the news almost every day. Hundreds of articles, editorials, online petitions, rallies and public meetings kept this issue alive. My 400 staff at the Canadian Federation of Independent Business lived and breathed the file for months. More than 75 major business associations came together and formed one of the biggest coalitions of businesses the country has seen.
What were the results?
After months of defending the proposals and suggesting they were open only to a few tweaks, the government did make — to its credit — some major changes. Most important, they dropped proposals that would have affected the treatment of capital gains — proposals that would have made it more difficult and expensive for owners looking to pass on the business to the next generation.
They also reintroduced their plan to lower the small business tax rate to nine per cent – a move expected to save entrepreneurs hundreds of millions of dollars over the next few years. And, they made an important concession on passive income by allowing up to $50,000 in annual passive income under the current tax structures.
While there are further details and amendments to come, including measures to encourage angel investing and potentially some further streamlining to actually make intergenerational business transfers less expensive, government finally seems to be recognizing the dire consequences of their previous package.
For that, we say thank you.
Are the changes enough?
The short answer is no.
While it was a big deal that government officially recognized the important role passive income can play in the life of a business and its owners, the $50,000 annual income threshold is really, really low. If used for retirement income, after a lifetime of risk-taking, crazy hours and hard work, the passive income cap would amount to less than a teacher’s pension in most provinces (and, remember, those teachers’ pensions can be accessed before age 60 and are guaranteed for life). More important, barring any further concessions, larger passive investments will be largely taxed away, denying a growing firm the resources it needs to build that second location or buy that new piece of equipment needed to improve its productivity. Remember that summertime rumour of the 73 per cent tax rate small firms would face on passive income? Sadly, that remains all too true and would hit entrepreneurs using passive income beyond the $50,000 annual cap.
And how about the current provisions around sharing business income among family members involved in the firm? That hasn’t changed much either. There has been a bit more clarity on the intent of which family members would be cut out of receiving a salary or dividends from a business – but just a bit. And, if passed, the baton will then be passed to the Canada Revenue Agency to determine if the spouse or adult children made a “meaningful” contribution to the business. You know, the same agency that recently wanted the dishwasher’s 50 per cent off a pizza lunch after their shift to become a taxable benefit (this hit close to home, as I started my working life as a Boston Pizza dishwasher).
If the CRA struggles to figure out where to draw the line in determining whose benefits or discounts should be subject to tax, I can only imagine how they’ll do in determining whether a spouse’s dividend cheque accurately represents their contribution to the family business.
Where do we go from here?
Building on the government’s progress, further changes are needed to ensure the tax reform package is understood and accepted by the small business community. These include:
- Releasing a comprehensive impact assessment on all remaining tax changes and allowing an additional period of consultation with small business owners before moving forward.
- Dropping the passive income rules entirely until an approach to ensure there are no unintended consequences can be determined. If government is committed to moving forward quickly, it should raise the annual threshold to $250,000 and ensure there are no scenarios in which business owners are faced with tax rates of 73 per cent. The threshold needs to be indexed to inflation and cumulative as well, as TFSA/RRSP rules are.
- Implementing a full exemption for spousal income and dividends from the new sprinkling rules.
- Adopting one of the two terrific private members’ bills (by Liberal MP Emmanuel Dubourg or NDP MP Guy Caron) to make the costs of selling one’s business to family the same as to a stranger.
More than anything, I hope the major takeaway from the 2017 war on small business will be that a government or political party does not earn credit among the middle class by being seen as going after small business owners. Canadians know that the average business owner is paying more than their fair share of taxes. An Angus Reid Forum poll conducted during the heat of the battle showed that only nine per cent of Canadians felt small firms, like hairdressers and corner store owners, had unfair tax breaks. In fact, small firms were the least likely to be perceived as having tax advantages among 10 groups in Canada. (The most likely were big bank executives and government employees.)
Fortunately, governments are beginning to recognize that the way to a healthy middle class is by supporting small business growth, not working to stunt it or tax it away. I was pleased to see this sentiment echoed by the prime minister during the kickoff to Small Business Week. If the government makes further needed modifications to its tax changes and continues to listen to the nation’s entrepreneurs, the past few months will mark an important reset in its relationship with small business. And I will be the first to applaud the progress.
This story was originally published in the Financial Post.