December 16, 2017

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Ottawa's proposed tax changes 'an attack on small business'

Finance Minister Bill Morneau’s proposed changes are a concern for business organizations.

SEAN KILPATRICK / THE CANADIAN PRESS FILES

Finance Minister Bill Morneau’s proposed changes are a concern for business organizations.

Business groups are rallying members over fear that proposed federal tax changes designed to close loopholes for the richest Canadians may hit small business owners the hardest.

Some are calling last month’s release by Finance Minister Bill Morneau on changes to tax planning for private corporations “the most radical change in 50 years.”

The proposals will tighten up the ability of small business owners to split income among family members.

It will address passive investment income that allows some to pay business tax on earnings rather than higher personal income tax.

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Business groups are rallying members over fear that proposed federal tax changes designed to close loopholes for the richest Canadians may hit small business owners the hardest.

Some are calling last month’s release by Finance Minister Bill Morneau on changes to tax planning for private corporations "the most radical change in 50 years."

The proposals will tighten up the ability of small business owners to split income among family members.

It will address passive investment income that allows some to pay business tax on earnings rather than higher personal income tax.

It will also address the practice used by some to take income out of business as capital gains to enjoy lower tax rates.

"It amounts to an attack on small business and entrepreneurialism. It is not good for the Canadian economy," said Cory Kolt, director of policy and communications for the Manitoba Chambers of Commerce.

There is also concern about the speed with which the regulations are being introduced.

Morneau released the proposed changes on July 18 and the deadline for public input is Oct. 2.

"It is very complex, very detailed, very confusing to a lot of people and business owners may not have a good sense of all the details," Kolt said.

"What is the hurry in doing this? You are talking about something that is going to radically change how small business owners pay taxes. This is a time where we need to have a frank and open discussion about this."

Kolt said the announcement was made in the middle of summer, when many people were on holidays and preoccupied with summertime activities, and everyone is playing catch-up.

The Manitoba Chambers of Commerce and chambers across the country are urging their members to write to their MPs to describe the impact the changes could have on their operations.

"The network has never been quite so mobilized as it is for this," he said.

The announcement has kept professional business tax advisers busy over the past several weeks.

Dan Kostenchuk, a tax partner in BDO Canada’s Winnipeg office, said he spent most of the past month advising clients on the changes.

Kostenchuk said he was taken aback because it was not so much a discussion paper as it was a draft of regulations that are ready to be enacted.

"It’s a big issue for a lot of private companies," Kostenchuk said.

"The government has declared it is targeting the high-net-worth individuals. But these rules impact every single business owner across the country.

"Even though they may be targeting the top one per cent, it encapsulates all businesses — if you own a garage with a couple of employees, this impacts you as well."

With about 500 employees, Winnipeg-based Vector Construction cannot be considered a small business, but the family-owned operation did start out that way.

"They’re trying to correct a problem with a blunt instrument that is going to potentially cause a lot of other collateral damage," said Dave Whitmore, president of Vector Construction, which specializes in concrete restoration work around the world.

The new regulations will require a test of reasonableness when it comes to splitting income.

"One of the main reasons for the ability to split income among family members is that when you are starting a business you take on a lot of risk — nothing is guaranteed," Kostenchuk said.

"You pay all your employees before you take a cent. There is no guaranteed pensions.

"The ability to split income with spouses and adult children is one of the benefits of running a successful business."

Kostenchuk said these regulations risk creating a climate that is anti-small business and may backfire when it comes to the federal coffers because it may put a damper on the wealth-generating power of the small business sector.

"In Canada we are essentially, in a lot of cases, significantly increasing rates for small business owners, whereas in the U.S. they are talking about slashing the personal tax rate," he said.

"If you are someone just starting out — say if you are a doctor just graduating from university — you may look at going to the U.S. and make more money and pay less tax. Those things could be a disincentive."

martin.cash@freepress.mb.ca

Read more by Martin Cash.

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