Tax planning proposals: Letter response to attack on family, small business

Posted on: August 9th, 2017 by Real Estate Accountants 2 Comments

Letter to MP, MPP on tax planning proposalsWith the federal government’s recent release of a series of tax planning proposals(see Tax Planning Using Private Corporations), they read squarely as an attack on small business, family business, and real estate investors. We have discussed the impacts of these tax planning proposals in detail both on this blog, and through a detailed article and webinar on bdo.ca. Many of our clients have asked for next steps. BDO Canada is submitting their comments on these proposals to the federal government, and all Canadians can do the same.

You can also write a letter to both your federal and provincial politicians. Please include the Minister of Finance, Minister of Small Business and Tourism, Prime Minister and leaders of the opposition parties. We also advise including your provincial leaders as the provinces have tax systems that frequently mirror the federal system.

Sample letter to elected officials

I have provided my personal letter to my elected officials below. If you would like a sample letter to send your elected representatives, download our Sample Letter to Elected Officials and customize with your thoughts.

My personal letter to elected officials

Good day,

I am writing to express my complete disappointment with regards to the government’s proposed tax reforms regarding private company tax planning.

I believe the government does not fully understand the impact this will have to small business owners, family businesses, real estate investors, and entrepreneurs, and ultimately to the Canadian economy.

The government indicates that they are “closing tax loopholes, cracking down on tax evasion, and ensuring tax fairness” with these proposals. I would argue that they are doing little of these things, and in fact, having the opposite impact in some cases.

First off, they are not closing tax loopholes. They are rewriting tax laws that were set out by years of legislation and court rulings. This appears to be the biggest tax change in 45 years, and many small business owners and families have no idea what is barrelling down the road at them. This will impact planning for their children’s education, for supporting their families, employees, charities, and communities, and ultimately for their retirement. In many cases, they will have the “rug pulled out from under them” if these changes go through.  Planning for many years and diligently building funds to have a massive tax increase at the conclusion with limited grandfathering is certainly not what I’d call fair.

Secondly, I am deeply offended on behalf of most business owners with corporations who are being painted with the brush of “tax evasion”. Again, the vast majority of business owners I have worked with over the years want to follow the rules, and pay their fair share of taxes. Painting the “wealthy” – which I would argue with the sweeping nature of these tax reform proposals is actually more squarely hitting the middle-class business owner – as tax evaders is a gross exaggeration that plays well in the media. But, it’s disrespectful to the majority of business owners who are following the rules set out for them, and making plans for their current and future business growth based on these plans.

Thirdly, the issue of tax fairness has been represented in this paper in such a way that either the government truly does not understand the reality that business owner’s face, or they just don’t care. Over and over the government provides examples of employees with T4 income, and compares them to the taxes paid by business owners using the tax planning strategies they are attacking. They use these examples to “prove” that the business owner is receiving an unfair advantage. Really? They are not comparing apples to apples. In my mind, they are comparing apples to baseballs.

  • Business owners often take on a level of risk (including borrowing on personal assets) that an employee does not.
  • Business owners do not have the same access to corporate pension plans. The use of their corporations to hold investments is often their equivalent to a pension plan. And, in many cases they are supplying a pension plan to their employees as well.
  • Business owners are the employers that pay CPP and EI premiums for employees. Business owners themselves do not have access to EI if their business fails, and significant restrictions exist if they want to take parental leave.
  • Small businesses are family businesses which at times involve all family members (many times unpaid) as crucial support for the business.
  • It appears to me that having one spouse spend considerable time with the business while the other is spending more time raising the family, then telling the spouse raising the family that their value to the business is essentially zilch, despite the family house being on the line and likely guaranteeing various business and personal borrowings, is grotesquely unfair. Typically, it is the woman spending time at the house, so essentially the government is saying that the value of women in a family is considerably less than men in the areas valued by governments.
  • The government is concerned with dividend sprinkling for their children between 18 and 24. It is obvious that these dividends are being used by business owners to help fund their children’s education.  This allows them to build the future of the country by funding post-secondary education for their children.  In many family businesses, these children will usually provide succession to the parents to allow the business to carry on to the next generation or take on new business ventures.  Failing to support education has far greater long-term economic concerns for the country.

An Industry Canada study concluded that 30 per cent of small businesses won’t survive longer than two years, and only half make it to five years. Business owners, real estate investors, and entrepreneurs are generally smart people – they know they are taking a big risk and they take it with their eyes open, and often with their families along for support in both monetary and non-monetary ways. But, no safety net exists for the business owner, or his or her family. If the business fails, unlike an employee, they can lose their homes, their life savings, and put their children’s education, and their retirement in jeopardy. They know this going in – they have the spirit to take the risk. 48% of Canada’s total workforce works for a small business. I fail to understand why the government is attacking them with these proposals, and justifies these attacks by believing they can directly compare a business owner’s activities with those of employees.

Finally, the proposals as put forth by the government are complex, costly for small business, and will definitely involve more red tape. By introducing “reasonability” tests into the process for income sprinkling, for example, you have set up a two-sided battle in which the business owner and their advisors will be arguing with the CRA over what is reasonable. Based on how far off the mark this paper is on understanding the realities of Canadian small business owners, and the increasing aggressiveness of CRA auditors, I have little confidence that their view of reasonableness is going to regularly square with the reality of running a business. This doesn’t even consider the rules on passive investing in corporations, a proposal that was abandoned in 1972 for being too complex to track and manage. With modern business realities even more complex today, and the proposals as they are set forth, I foresee chaos and cost for businesses to meet these requirements. Introducing more red tape into a complex business environment will only increase costs for business owners. I fear decreasing profits will ultimately result in fewer businesses, less competition, and fewer Canadian jobs.

I realize the government is looking for more tax revenue, rightly or wrongly. They estimate that they are attacking $250 million of revenues with these proposals. This is a drop in the bucket compared to the underground economy, which was estimated at $45.6 billion in 2013 per Statistics Canada. Even at the low corporate tax rates of approximately 15% depending on the province/territory, and even if they were able to attack only a small percentage of the underground economy, this would far dwarf the revenues they are trying to generate with these attacks on businesses operating legally under the current rules. I have to wonder what they are thinking in bypassing a more lucrative and, presumably, more appealing target.

Or is this an effort at wealth re-distribution instead of a tax grab? Canada’s current system of taxation is actually quite effective at letting those who are at the lower end of the income scale pay lower tax rates, while those at the higher ends pay significantly higher ones, and a significantly larger portion of the total tax pie in Canada, as it should be. While debatable what rates of taxes various individuals should pay, having roughly half of taxpayers, those at the lower income level, pay less than 5% of personal income taxes seems quite progressive.

This legislation in my opinion is going to seriously harm our business community and their families.  On top of this, given the economic environment in the US and their government’s desire to decrease taxes, this is absolutely the wrong time for a set of proposals to limit the incentive of entrepreneurs, stifle the growth of private corporations and ultimately burden the Canadian economy.

I look forward to your reply.

Warm regards…

George E. Dube, CPA, CA

2 Responses

  1. DAVID L TINDALL says:

    The proposal to tax retained earnings of small businesses so that the owners of such pay the same amount of tax as employees enjoying the same income contradicts the long standing principle of assisting small businesses to grow by taxing income left in the company at a lower rate.What they are proposing is nothing more than a prepayment of taxes which will eventually be paid when owners withdraw these funds from their corporations. If such dividends or bonuses are taxed again when actually paid this would be a travesty. If nothing else, the government should be required to pay a decent rate of interest for this prepayment of taxes.

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