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Proposed Federal Tax Changes

Proposed federal tax changes punish business-owners and family; discourage economic growth

August 26, 2017

The following was published in the The Guardian PEI editorial section on August 26, 2017.

Small business is the heartbeat of our Island economy. Small business could be your local garage, the bakery down the road, or the clothing store on the corner. They are our farmers, fishers and tourism operators. They are the business names you see on the back of a hockey jersey, or on a sponsorship banner at a local fundraiser. They create jobs. They invest their money in both their business and their community.

At the Greater Charlottetown Area Chamber of Commerce, we celebrate business. According to the Business Development Bank of Canada, PEI has the largest number of small business jobs per capita in the country. Business growth is the solution to many of the province’s economic challenges, and we credit much of PEI’s economic success to the hard work of our small business owners.

The federal government has released a document proposing major changes to how businesses are taxed. The tone of this document paints an unfair picture of business in Canada.

In this document, government suggests the changes are about “fairness,” and compares the tax treatment of a business owner with that of an employee. The comparison is misleading — there are reasons why business owners are taxed differently. Small business owners create jobs. They take risks by investing their own money or pledging their own collateral to start the business. In addition to these risks, business owners have expenses that their employees do not. They pay for their own health plan and CPP benefits and are generally not entitled to EI benefits. They also pay for their employees to have access to these same benefits.

The document also implies that only the wealthiest Canadians are affected by the proposed changes. This is simply not the case. A Chamber member tax specialist estimates that between 80-90% of their small business clients will be impacted by these changes.

How?

To begin, government wants to increase the tax rate on the money a business has earned and saved. When a business has a successful year, they have the option to save extra revenue and invest it in their business to earn “passive” income. To business owners, this money is an emergency fund that can carry them through an economic downturn. These reserves, and the income they generate may be used to pay employees wages when business is slow. They may also be used to help expand business operations in the future.

Currently, these savings are taxed at a rate of approximately 55%. The proposed changes could see this rate increase as high as 75%. The document says this measure is intended to crackdown on “high income individuals,” but the rules would apply to all incorporated businesses in Canada – businesses like restaurants, retailers and farmers. By raising these taxes, government punishes entrepreneurs for reinvesting their own money to help grow their business, and the economy.

Government’s consultation document also unfairly paints family-run businesses in a negative light. In the proposed changes, business owners must prove the amount of time and investment a family member puts into the business is “reasonable” compared to their payment received. Not only does this create unnecessary and costly administrative hurdles, it devalues the risk that all family members invest in the business. Small businesses are family businesses – with a commitment by all family members. Entrepreneurs put their life savings at risk, and consequently, so do their spouses and children.

The tax specialist previously referenced estimates that if these changes take effect, a small business owner earning $50,000 a year, who splits their income with their spouse, will pay $225 more a month in income taxes. This is a 27% income tax increase.

Finally, the proposed changes penalize entrepreneurs who want to sell their business and retire. Many business owners plan their retirement around selling their business. In certain cases, the current proposal will see taxes on the sale of businesses double or triple. This will result in a huge loss of funds intended to support business owners and their families during retirement years.

Nobody supports tax evasion or loopholes; however, these changes will effectively punish local businesses and discourage entrepreneurship. The proposal follows other recent changes made by the federal government such as cancelling plans to reduce the small business tax rate and tightening rules on partnerships, not to mention, a new carbon tax and increased CPP premiums.

We encourage all Island business owners to contact their financial representatives and find out how these changes could impact their business, their family and ultimately their future. We urge you to further share your concerns with the federal Department of Finance and your local Member of Parliament prior to the October 2nd consultation deadline.

PEI’s four MPs have the power to stand up for Island business. As a Chamber, we call on them, with their colleagues, to stop these tax changes that discourage economic growth and punish our hard-working business owners and their families.

 

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