By Dan Kelly
Published in the Financial Post on September 7, 2017
If one listens to the messages coming out of the federal government in recent days – the need for tax fairness, a push to end tax loopholes, ensuring Canada doesn’t create two classes of taxpayers – it would seem hard to argue against recent proposals to change the tax system for small business owners.
But why then are small business owners so angry at their government? Let’s explore the reasons:
- These are major changes. Changes have been proposed to the way small businesses share income among family members, save in the business through passive investments, and distribute earnings through capital gains. All three will affect huge numbers of small business owners and will serve to increase the overall tax burden on many.
- The changes are being rushed. To introduce the largest changes in decades to small business taxation during the dead of summer, with pre-written legislation and a 75-day consultation does not inspire confidence that government is serious about listening to the concerns of small businesses.
- Small businesses have been burned already. During the 2015 election, the government promised (in writing no less) to reduce the small business tax rate to nine per cent by 2019. Unfortunately, in the 2016 budget this promise was ditched and businesses were told the rate would remain at 10.5 per cent.
- The language used to promote the changes. Every time Minister Morneau utters the word loopholes, small business owners feel they are being accused of cheating taxpayers or shirking their responsibilities as Canadians. One government MP accused small business owners of sitting back in their gated communities, suggesting workers could just eat cake, like modern day Marie Antoinettes.
At the Canadian Federation of Independent Business (CFIB), I represent 109,000 independent business owners who already face an incredible burden of taxes and charges, and that burden is rapidly rising with five years of carbon taxes and pricing hikes starting in 2018 and seven years of CPP hikes starting in 2019.
In my 23 years of advocating for small businesses of all stripes, I’ve never seen the business community spontaneously combust the way it has in recent weeks.
But does Canada’s tax system really give small business owners an unfair advantage? The answer is almost certainly no. While the way incorporated firms pay income taxes is different than that of personal taxpayers, it is important to look at the overall burden of taxation facing different taxpayers. Businesses pay dozens of forms of taxation – some unique to them and others at higher rates than employees. For example, employers pay 40 per cent more in Employment Insurance and double the Canada Pension Plan premiums as do employees.
And while some academics and politicians suggest that these changes will equalize the income tax treatment between independent businesses and employees, tax advisors report a very different story. Estimates are that businesses will pay 73 per cent in taxes on some forms of income, far higher than even the highest rates charged to employees. And as a result of some transitional issues, some income could be taxed at 93 per cent under other proposals.
Sadly, many Canadians believe that owning your own business is like a licence to print money.
To try to lessen the growing backlash, Minister Morneau suggested that these changes would not affect small business owners earning less than $150,000. But this is at odds with the interpretation from virtually every major accounting firm and smaller tax professional. And even if Morneau is right, these new rules will be subject to the interpretation of the Canada Revenue Agency and, in time, our tax courts. The resulting uncertainty, paperwork and red tape will no doubt be massive. And, with decades of tax experience, CRA’s interpretation of the rules is often quite different than what Finance originally promised.
So why are we going through all this? Is it really to ensure our tax system is fair? If that were true – if these provisions do provide a retirement savings benefit to small business owners compared with ordinary workers — should we not also address unfair, tax-supported public sector pensions? After all, civil servants can often retire as early as 55, claim a bridge benefit to avoid the CPP penalty the rest of us would experience and then split their pension income with their spouse. Taxpayers are picking up the tab for all that.
Is it because small businesses are an easy target? Sadly, there are still many Canadians who believe that owning your own business is like a licence to print money. What would help reinforce a government’s middle-class credentials more than going after the rich business owner? But with two-thirds of business owners earning less than $73,000, government needs to remember that small business owners are the middle class.
The good news is that MPs are beginning to feel the heat. Heading into the Liberal and Conservative caucus meetings, many MPs were reporting on the number of calls and questions from their constituents. CFIB delivered nearly 15,000 signed petitions from business owners to MPs of all stripes. And the Coalition for Small Business Tax Fairness – a group representing more 50 business associations – was formed to combat these changes.
When I’m asked what individual business owners can do to push back, I say that sharing their own concerns with their MP is incredibly powerful. But joining a business association, talking to other business owners, tweeting your concern using #unfairtaxchanges and signing the online petition are also great ways to support the cause.
There are more than 1.1 million businesses in Canada with paid employees and 3.5 million entrepreneurs when you take into consideration all the self-employed. Small business is a big group and our voices need to be heard.
This story was originally published in the Financial Post.