Earlier this summer, the federal government announced plans to eliminate several tax incentives they believe unfairly encourage wealthy private Canadian corporations to choose incorporation as a way of avoiding tax payments. From the moment this announcement was made, small business owners, doctors and farmers have voiced tremendous concern and want to see amendments made to these reforms.
The federal government’s proposed plan would eliminate income sprinkling, a practice allowing business owners to pass income to family members who are in lower tax brackets. Private corporations would be limited, as would the conversion of a corporation’s regular income into capital gains. The government sees this as a way of limiting the use of tax advantages, which have been exercised by Canadian small businesses for decades.
October 2 marks the end of a 75-day public consultation period used by the federal government to hear concerns from the public. Finance Minister Bill Morneau shared that some push-back was to be expected, but as the consultation period wraps up, it is clear many Canadians are vehemently opposed to the proposed tax changes. In the House of Commons on Thursday, Morneau stated that nothing in what the Liberal party is proposing is intended to hinder the abilities of small businesses. Over the past three months, Morneau has repeated this sentiment, wanting to clear up misinformation about how the proposal will impact business owners.
In late September, while speaking to the Greater Vancouver Board of Trade, BC’s finance minister Carole James said she would be surprised if the Canadian government did not act upon the shared concerns voiced by business owners in British Columbia. She believes Canadians will see a shift from the federal government, and believes adjustments will be made to the proposed tax reforms.
This may be of some encouragement to small businesses involved in BC’s tech sector, as some are feeling a lack of support for their entrepreneurial initiatives. Innovation is a top priority for Ottawa, yet the proposed tax changes could put all streams of funding for entrepreneurs and small businesses – personal savings, angel and institutional investors, family support – at risk. Bill Tam, the CEO of The BC Tech Association, noted that many small tech companies have created their own unique structures, providing a different income stream or flow to ensure innovation and investment is not stifled. If limits are placed on the use of private corporations, as is being proposed by the federal government, this creates additional worry regarding taxation for these companies. Lawyers, farmers, shopkeepers and other businesses who have incorporated their small businesses across BC have been speaking out, with the tech community joining that chorus decrying the government’s logic behind tax cheaters who unfairly use tax-saving mechanisms.
The ever-growing storm of protest has many economists, accountants and financial planners refuting the underlying assumptions of this deeply flawed logic. The proposed tax change would fundamentally alter the relationship between family business owners and government. Many in BC’s financial sector are wanting this tax reform to be thoughtfully studied so unintended consequences of taxation will be limited in reach and potential damage that could be done to the fabric of BC’s economy.
The federal government’s goal of a long-term, fair tax system that provides a basis for people to invest and make Canada a more successful and prosperous nation, is fraught with trepidation from many citizens of British Columbia. If unintended consequences are to be avoided, the people of British Columbia must work with governments at both the federal and provincial levels to ensure small business owners are not harmed by implementation of new tax reforms. Small businesses make up the backbone of BC’s economy, and if British Columbians want to encourage innovation, security for retirement planning and the future generations of the province, transitioning to new taxation rules must be done in a mindful manner so hard-working business owners can continue their immense contribution in furthering BC’s economy.