Five Examples of Why the July 18th Tax Proposals Are Not Being Explained Properly
Let’s talk about the language being used. The government is talking about closing loopholes, creating a level playing field and increasing fairness. They are doing none of those things.
When tax legislation is introduced, the suits talk about proving incentives for business success, they talk about supporting small businesses, and they congratulate themselves for the legislation. Now that they need to raise more tax revenue to fund public sector pensions – they change the language and talk about closing loopholes. When they introduce legislation it is an incentive, when they change the legislation it is closing a loophole. So to be clear, small business owners are not exploiting loopholes they are following the tax laws in Canada. Let’s not blame the business owners for complying with the laws of our land.
Secondly – the level playing field discussion. We have heard much about the comparison of a salaried person and a business owner. In this comparison the business owner is paying less tax, but that is not the whole comparison. I imagine there are many business owners, who would be happy to pay more tax if they could get paid for statutory holidays, get vacation pay and have someone create a defined benefit pension plan for them. Not to mention the joy of having an employer pay them and not having to go look for customers. Employees enjoy many advantages over the self-employed. If we are going to talk about level playing field lets level it all, benefits included.
Thirdly – Fairness – The top marginal tax bracket in nearly every province is now over 50%. The high income earners are already paying over 50% of their income in income taxes. Fairness might suggest that tax rates should be lower – not that these high income earners are not paying their fair share. Anyone who is paying 50% of their income in taxes is paying their share.
Fourth – The suggestion that business income splitting through dividends to family members will no longer be allowed is quite curious. We have pension splitting (50% of pension income can be transferred to a spouse) but we are not going to allow business owners to split income? The pension income splitting does not apply to CPP or OAS, just to RRSP and employer provided plans. In Canada the people who have employer provided pension plans are predominantly employed in the public sector. When pension splitting was introduced there was talk of how this recognized the situation where one member of the family might not have much pension, because they were not employed outside the home for a portion of their working lives. This logic apparently does not apply when we are talking about business owners, only when we are talking about public sector employees.
Pension splitting benefits public sector employees and income splitting benefits business owners – there is no difference in the concept – the only difference is in which Canadians are benefiting.
Fifth – How about the language “not active in the business?” These words are being used as the excuse for not allowing business owners to split income with family members. What will this mean? I have been self employed for 30 years. At the beginning I used my family home for collateral to borrow money for my business. My family shared in this risk. If I was not able to make a go of my business and we lost the house my whole family would have been impacted. Families share the risk of self-employment – it would be fair to allow for the family to share in the rewards.
If you know anything about being self employed you know that an entire family is involved in the business. Think of the time we are going to be spending documenting the activity each family member puts towards the business, to prove they are active – if these proposals go through.
The language used by the federal government suggests they are protecting the middle class. They are not protecting middle class business owners. The impact of these proposed changes will be felt the most by business owners with net incomes under $100,000. A common scenario in my accounting practice is a family run business taking business income of $60,000 annually and paying that to two shareholders. There is far less tax on two people each earning $30,000 than on one person earning $60,000. This is the group of people who will see their tax bills soar if the changes to paying dividends to family member s are implemented. The business owners who are taking more than $100,000 out of their businesses are already paying the high tax rates so their impact will be less. The conversation is that these rules target high income earners but that is not how the rules will work, all business owners will be impacted.
There is an old saying that the American dream is to have a business and get rich and that the Canadian dream is to have a government job. If this was not already true the proposed tax changes will make it so.