UPDATED: Oct 21/17 see [NEW]
The Federal Government is walking back their proposed tax changes. We will update this post with relevent links.
Oct 20/17: Federal finance minister Morneau pitches small business on tax reform (CBC)
Oct 20/17: Examining Bill Morneau’s tax-reform tweaks (Canadian Manufacturing)
Oct 20/17: Morneau announces plans to work with angel investors in Waterloo (570 News)
Oct 20/17: Morneau assures tech community tax changes won’t squeeze out investment capital (Globe and Mail; paywall)
[NEW] Oct 16/17: CFA reacts to announcement of small business tax changes (Canadian Federation of Agriculture)
On July 18th, the Federal Government’s Department of Finance announced significant proposed changes to certain mainstream tax planning. Details have been released in a comprehensive, technical consultation paper focusing on tax practices commonly used involving private corporations.
These tax practices are being labeled by the government as tax loopholes and they are implying that small businesses are taking advantage of them unfairly. That entrepreneurs should be treated equally alongside their employees when it comes to taxation.
A brief summary of the proposed changes:
- Income splitting (dividends and salaries) with adult related individuals will no longer generally be possible unless the individual contributes to the business
- Multiplying the Capital Gains Exemption will be severely curtailed
- Increased reporting requirements for trusts
- Increased taxation on passive income earned in corporations
Most of the proposed changes apply to 2018 and beyond. The new rules are subject to a consultation period from now until October 2, 2017. [Courtesy: SB Partners | More details]
The finance minister Bill Morneau, healthcare advisor Michael Wolfson and UBC’s Kevin Milligan are convinced that these tax changes will only affect “top earners” who operate their businesses as Canadian Controlled Private Corporations (CCPC). Small business owners, associations and the Canadian Federation of Independent Businesses (CFIB) think otherwise.
Consider these recent headlines from this summer:
- Small business owners say they are unfairly targeted by proposed tax changes (CBC)
- The sky is falling on small businesses – or is it? (Globe and Mail)
- Tax changes proposed by Trudeau government are unfair and could have many unintended consequences (Toronto Sun)
- A 93% tax rate? Private corporation tax could make it possible (Financial Post)
Vids to Watch
Minister Morneau grilled by citizens [in Oakville] angry over tax plan
Trudeau dodges questions over tax benefits he receives through family trusts
Silicon Halton Members Weigh In
Earlier this month, Silicon Halton members representing local technology companies met to learn and discuss the impact these changes will have on their businesses if they are implemented.
These tech leaders are frustrated, confused and angry. Clearly, the academics, policy advisors and Canadian government don’t get what it takes to be an entrepreneur and build a Canadian company. There are three things, I believe, that the policy makers fail to understand when it comes to entrepreneurs and the SME market.
- Builders, not earners. They build companies by taking significant risk which they live with each and every waking moment. They use the cash their business generates to invest in people, in ideas and to grow their business. Very often they come last when it comes to “earning” a living because they put their employees first.
- Practitioners, not theorists. They roll up their sleeves to help their customers be successful. They spend much of their waking hours (often more than 12 hours a day) working on and in their business generating cash by delivering value to the markets and customers they serve. They have little patience for academics, public servants and career politicians who think they know what it takes to be an entrepreneur and how they should should start, grow and scale their business.
- Producers, not cheaters. Yes, there is a negative narrative right now on social media that portrays entrepreneurs as tax evaders. Entrepreneurs produce jobs, they pay taxes, they pay employment insurance, they pay into Canada’s pension plan.
The reality is that small to midsized companies are the largest contributors to the Canadian economy. They employ over 10M Canadians. Canadian small and mid-sized companies generate significant tax revenue that is used, in part, to pay the 4.4M people employed by the government and government funded organizations.
Finally, the entrepreneurs that become “rich” earn it through hard work, sacrifice and taking risk. They don’t become millionaires like many government employees do via pensions and other entitlements that in my view are fair game to repeal.
Consider what this tech entrepreneur says about these proposed tax changes:
Consider what another tech entrepreneur said to his MP, John Oliver:
"Per the following reports from Statistics Canada you will see that there are 1,165,000 SME businesses in Canada.
- These SME businesses employ 10,460,000 Canadians
- Large Entreprise only employs. 1,130,000 Canadians
- There are another 4.4 million Canadians employed but they are government and government funded employees.
So it looks like the SME sector pays for 90% of government funded employees. And pretty much all government employees retire millionaires because of their guaranteed pensions. For the SME sector there are no guarantees and certainly No pensions, We take huge risks and there is no one to take care of us when things go wrong."
Robin Smith, co-founder of VL Omni, featured on CBC's On the Money
How Will These Changes Affect Small Business?
According to the Canadian Federation of Independent Businesses (CFIB) these are most significant tax changes in decades, with the potential to severely harm Canadian small businesses especially in three areas: 1) Making it harder to share income with your family; 2) Dramatically increase the taxes on your business investments, and 3) Prevent you from passing down your business.
In CFIB’s webinar, CEO Dan Kelly and tax expert Evelyn Jacks outline how these changes could affect us all. We've provided an indepth timeline and here's the raw transcript [Direct Download].
02:39 | Opening remarks from Evenlyn Jacks
03:55 | Managing Tax Risk is More Important Than Ever Now. What Evelyn Jacks covers in this webcast
05:04 | Where does the wealth lie in Canada? The three fasted growth assets: 1) Mutual funds, investment funds, income trusts; 2) Business equity, and 3) Stocks
06:04 | What's at Stake in these tax reforms and why taxman wants a bigger piece of passive investment income earned by private corps
06:58 | Spotlight on Private Business Owners and key definitions federal government is using to define "High Income" and "Unintended Advantages". An entrepreneurs tax audit risk will be exponentially higher than an employer's.
09:52 | Principle of Canadian Tax System and the rights of entrepreneurs to pay as little tax as legally allowed
11:02 | The Reality for Governments. Service economy, shift in demographics and high personal tax rates are driving the growth of private corps
12:17 | Federal Personal Income Taxes and new tax bracket introduced in 2016.
13:17 | Provincial Personal Income Taxes (on top of Federal Income Taxes).
15:07 | Risk Assumption: Your Reality Employed and Self Employed. Tax audit risk are proposed to be increased. Integration of Personal Corporate Tax
20:07: | Is it Better to Earn Investment Income Inside or Outside the Corporation?
20:52 | What's Changing: Taxation of Passive Investments. With new changes the effective tax rate will be 72.7%! Yet, the Finance Canada say:"new rules will have 'limited impact' on existing passive investments". But are they right? The answer is no... the devil is in the details.
23:23 | The Purpose of Small Business Deduction, Jun 18, 1971 and what are the questions for Canadian Controlled Private Corporations (CCPCs)?
26:37 | Income Splitting with Family Members. Specified vs. Connected Individual. Definition of Split Income (now vs. the proposed future). Test for 18 to 25 years old starting in 2018.
30:34 | Gender Issues. Families, by default have a lot to lose.
31:54 | The problem of "reasonableness testing" being re-introduced. How CRA will "second-guess" legitimate business purposes in a vague and arbitrary manner resulted in unfair tax treatment.
33:11 | Capital Gaines Exemptions. Significant proposed changes. What is an ineligible gain going forward? Election to crystalize Capital Gains Exemptions. Talk to your tax accountant immediately.
35:08 | Surplus Stripping. More concerns when it comes to succession planning?
35:34 | Questions on the Proposals with respect to double and triple taxing. And don't forget there are other changes for professional practices that will increase costs to run a business.
36:41 | Key things to think about and ask your MP
37:34 | Who Bears the Burden of Corporate Tax Increases? For every $1 increased in Corporate Income Taxes wages fall by $1.52 in AB, $2.72 in MB and $3.85 in PEI
38:16 | Questions and Strategies.
39:06 | Summary and your voice matters so talk to your MP, talk to your tax accountant
39:50 | Hand over to Dan Kelly from CFIB to present on: "The Fight Against #unfairtaxchanges.
41:00 | Entrepreneurs are concerned that the Canadian government is accusing them of being tax cheats. That the value of the Canadian entrepreneur is not truly understood and that small business is the major contributor for jobs, economic prosperity and growth.
42:20 | Proposed tax changes but why are their lower tax rate on small businesses in the first place? There are three major reasons.
43:56 | The Four Key Issues Facing Small Businesses Because of Proposed Tax Changes. They will create a decade of uncertainty.
45:03 | Small Businesses are Firmly in the Middle Class. CFIB believes all small businesses will be affected by these proposed tax changes not just the ones earning $150K and up.
45:51 | How the Canadian government is confused. They are encouraging innovation but taxing the funds that small businesses use to innovate.
47:16 | Taxation Facts that All Levels of Government Need to be Reminded Of. Employer vs. Employee tax fairness
48:40 | What We Want from Government.
49:42 | What The Small Business Community Needs to Do Now.
52:06 | Important Dates
54:00 | Q&A
54:21 | "Is there a document that we can have access to that provides the specifics of the tax proposals?"
55:01 | "Does government think that a different government might reverse all of these tax changes?"
56:10 | Comment from angry tax accountant on impact on small business and entrepreneurs
What Can You Do?
At the very least it’s important that we better understand and appreciate the role entrepreneurs play in making Canada successful. And, that entrepreneurs are some of the hardest working people and not tax evaders. Government needs to provide entrepreneurs with incentives, tools and a climate that motivates them to start and grow companies.
Learn more about how these proposed tax changes will affect entrepreneurs and their companies. Discuss this with your MP, with other Silicon Halton members and regardless of which side of this debate you’re on… recognize that the Canadian economy and employment is driven mostly by small and mid-sized businesses and the entrepreneurs and employees that start and run them.
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