New changes affect small Canadian businesses

By Miriam Ostermann, Associate Editor

A couple of hundred people flocked to a town hall meeting Sept. 23, where Conservative Member of Parliament (MP) for Carleton (Ont.) and Shadow Finance Minister Pierre Poilievre addressed the proposed federal government tax changes – controversial proposals described as closing unfair loopholes by Liberals, yet seen as a cash grab by Conservatives.
The new tax changes would illustrate the largest reform of the Canadian tax system in 40 years, with a 75-day consultation period, and result in a possible monetary gain of several billion dollars annually. Yet critics argue the tactic is an attack on small businesses, those with less than 100 employees.
Outraged farmers, lawyers, small business owners and doctors had the opportunity to speak with Poilievre on the effects the changes pose on their family members, on retirement and succession plans.
“This illustrates yet another example of government attempting to take more of what other people have earned and put it in the position and control of politicians who have not earned it,” said Poilievre.
“They’re attempting to ram it through in 75 days of so-called consultation. A consultation when our farmers are on their fields, and will end when many of them will just finish their harvest. A consultation that happened right when our tourism sector was busy serving Canadians on vacation, and a consultation that did not reach out to people who are going to be most affected.”
Under the Trudeau government, the proposal introduces three changes: address income sprinkling, limit the use of private corporations in making passive investments and limit the ability to convert a regular income into capital gains.
While the government stands to generate $250 million per year from income sprinkling – where small business owners use their business to transfer money to family members in lower tax brackets – a whopping $3 billion a year is estimated to come from reforming taxes on passive income.
Yet questions remain unanswered on the details of the proposed changes. Poilievre has been trying to get some clarification on what these changes mean for spouses and other family members who perform random and often crucial tasks affecting the operation of the corporation. So far his questions have gone unanswered.
But Poilievre was more concerned about the effects on passive income – sick leave, maternity leave and pension – with what he called a double tax.
Currently, a small business is being taxed 15 per cent up front on earnings, and able to invest the remaining 85 per cent in passive income within the company.
According to Poilievre, the government believes this to be a tax loophole where had the money been taxed 50 per cent upfront, the base to invest in passive income would have been lower and so the return would have been lower as well.
“What they forget is that when you pull out the rest of the money it will be taxed at the same rate it would have been if it were a wage … I don’t see what the problem is – you’re still paying the same amount of tax, you’re just paying part of it later on,” he said.
“What they’re proposing to do is that all the passive income that you earn on your investment income within your company will now be taxed twice; once inside the company at a rate of 50 per cent in the year it’s earned and once when you take it out at roughly 45 per cent of what’s left.”
The total taxation on passive income held within a company is expected to rise as high as 72 per cent.
Furthermore, the reform would create an incentive to sell a small business to a non-family member where capital gains remain taxed at 25 per cent, rather than face an increase by selling the asset to a family member.
“It’s small businesses, farms, small farms, corporate people who are trying to make a living and get slammed by the government,” said Sylvia Carruthers, a lawyer from Chestermere who was at the event and owns farm land in Ontario.
“I’m certainly not in favour of it. I run a business. I never incorporated because there are certain challenges to doing that anyway, but what happens is that I have to pay my own. I don’t get stat holiday pay, I don’t get a pension and yet we’re not allowed to accrue passive income in our corporations without paying a huge tax on it.”
Other residents in attendance raised concerns about the economy and the possible loss of doctors, chiropractors and other small business professionals.
Strathmore-Brooks MP Martin Shields encouraged residents to sign petitions, become active on social media, talk to employees and contact other members of parliament.
Mayor Michael Ell was also in attendance along with Strathmore Councillor Bob Sobol, who had requested more information regarding the federal government tax changes from Shields, resulting in the town hall meeting on Sept. 23.