Halifax, Nova Scotia -- September 12, 2017 -- Ottawa's fall parliamentary session started September 11, and we’re already seeing signs that recently proposed changes to small business taxes may be the biggest battle on Parliament Hill.
Kelvin Campbell is the Owner/Operator of CSN Chapman Auto Body in Halifax, Nova Scotia. He believes that the proposed tax changes are an issue that all bodyshop owners should address with their Members of Parliament.
“I think this is one of the most important issues to face small business in quite some time,” he says. “Given the fast pace of which this industry is changing, this will have a dramatic effect on our ability to invest in our businesses.”
Campbell has provided us with the text of a letter sent to his MP below. He has given permission for other owners to copy this letter and send it to their MPs.
September 7, 2017
To whom it may concern,
I am writing to you to express my deep concerns with the proposed tax changes released by the Department of Finance on July 18, 2017. These new rules will be devastating for my business and for all family businesses in this country and I urge you to intervene and work on our behalf to seek a delay to allow time for a more fulsome review and consultation on the impact.
My comments below are not technical in nature, rather they represent my thoughts and position relative to the longer-term impacts and the fundamental unfairness with regard to how these major changes in tax policy are being presented and implemented by the Minister of Finance.
1. Federal proposals represent significant tax reform for family business in Canada. The Minister describes the proposals as closing “tax loopholes” for the rich – this is clearly misleading.
The federal proposals released by the Department of Finance on July 18 will fundamentally change the way private business is taxed in our country. Review and reform of our tax system may very well be appropriate; however, it should be conducted in a more complete manner with appropriate study and consultation. Significantly reforming the tax rules for private business with a 75 day consultation period is just not appropriate.
2. Family business owners are the middle class. The approach and language in the new tax proposals is blatantly encouraging class distinction in Canada. They describe business families as the rich who use corporations as “tax loopholes”, and suggest that the middle class are victims of all of this. This is unfair and totally false, as a majority of small and medium-sized business owners are middle class Canadians - they are hard working individuals who also employ many other people in the middle class in just about every community across Canada. The federal tax proposals directly target and significantly impact family business owners and by extension their employees and is therefore a negative for our middle class.
3. Family enterprise is the engine of our economy. Small and medium sized businesses are the backbone of our economy and responsible for the majority of job creation in Canada.
This sector collectively is the largest employer in the country and a major contributor to our growth. There are literally hundreds of thousands of small and medium sized businesses in Canada. In addition to the employment they create, these business families are very philanthropic, contributing in a significant way to the communities from coast to coast where they work and live. The government’s tax proposals send a very negative message to current and future business owners about the nature and importance of their role in our economy.
4. It’s misleading to equate business owners with salaried employees. Business owners take on significant risk in running their businesses. The tax treatment of a business family should not be compared and benchmarked against a salaried employee who does not assume similar risks, and in fact enjoys the benefit of labour laws, employment insurance, and other mechanisms in the system. The current federal tax system, which allows business owners to use corporations and do legitimate tax planning in recognition of the risk and sacrifice they make, has been in place for decades and it is inappropriate to now characterize this as “loopholes”. Our tax system should support and promote business ownership for the contribution they make to our economy and the risks and sacrifices they take on for their employees and communities.
5. Proposed new rules introduce more complexity and uncertainty. Many would argue that our current system is already too complex making it burdensome for businesses to comply and for the CRA to administer. These new rules will introduce even more complexity and uncertainty, particularly with respect to their application. The rules as drafted, introduce subjective assessments in their ongoing application, the potential for double taxation for business families, and possible retroactive application. Clearly this is not consistent with the Liberal government’s 2015 stated promise to simplify our tax code.
6. Intergenerational business succession made even more difficult. It has been a sore point with business owners for some time that the current tax rules applicable to the transfer and sale of a family business favour sale to an unrelated third party such as a private equity fund over the transfer of the business to a daughter or son. That’s clearly unfair and punitive. To his credit, the Minister has invited ideas and views on how to better accommodate genuine intergenerational business transfer. Unfortunately, the new rules as proposed by the Minister, specifically those related to treatment of capital gains, will make the transfer of a business to family members even more difficult and could lead to double taxation of some estates.
The technical analysis of these proposals shows just how far reaching and punitive these new rules will be for small and medium family businesses in Canada – they fundamentally change the way private family owned businesses are taxed in this country.
The proposed changes will have a direct negative impact on the operation of these businesses and the people they employ in just about every community from coast to coast in Canada.
I respectfully request that you meet with the Minister of Finance on my behalf and behalf of all family businesses in Canada to express our concerns and to ask for a delay in order to conduct a more complete review of the proposals. When making fundamental change in tax policy like this, history supports a deeper study of the approach and options with much broader consultation than the 75-day period set out by the Minister.
Kelvin T, Campbell
CSN Chapman Auto Body Ltd.
Halifax & Bedford
In brief, Federal Finance Minister Bill Morneau has proposed three changes to taxation that will impact small businesses:
- The curtailment of "income sprinkling," a method by which business owners shift a portion of income to family members, either through salary or dividends.
- The curbing of "passive investment income," which the government describes as the investment of money left in a corporation, for purposes other than to invest directly in growth.
- The conversion of a corporation's regular income into capital gains, which typically attract a lower tax rate.
It’s the first two measures that are attracting the most criticism from some small business owners and tax experts. Currently, the federal government is in the midst of a 75-day consultation period to allow people to provide feedback that may lead to adjustments in the proposed changes. The consultation period officially closes on October 2, 2017.
"Income sprinkling" refers to the practice by business owners of distributing money to family members who earn less, thus allowing income to be taxed at a lower rate. Morneau has stated that he plans to impose a "reasonableness" test so this does not punish legitimate family businesses. In theory, the test will determine just how much work a family member actually does at a business, and if they can really lay claim to profits. Official estimates from Finance Canada say that approximately 50,000 Canadian families will be affected by this change.
“Passive investment income” refers to the practice of parking money in a business—typically through investments in stocks, real estate or other financial products—and thereby paying lower corporate taxes on the income earned from those investments. A statement from Finance Canada indicates the agency has not yet determined how to close this loophole.
Collision Repair magazine wants to know what you think of the proposed changes. Fill out latest survey at this link and let us know!