Sourced from : Globe and Mail – Sept 18 2017
Ottawa’s call for changes to the way private companies are taxed has sparked widespread outrage and raised questions about the perceived value of entrepreneurs to the Canadian economy. How we got here and where we are headed
The tax-avoidance quagmire that federal Finance Minister Bill Morneau wants to clean up via proposed small-business tax changes is one Ottawa helped create – more than four decades ago, when another Trudeau was prime minister.
Prime Minister Justin Trudeau was only a few days old when a broad package of tax reforms enacted by the government of his father, Pierre Trudeau, took effect on Jan. 1, 1972. While small businesses had received tax breaks before, the 1972 tax reforms instituted the small-business deduction, which made the effective tax rate for small businesses substantially lower than that of larger companies. This is the basis of the tax structure under which small businesses still operate today.
The intent was simply to let small businesses hold onto more of their profits so they could finance their growth. But the changes put in place the foundation for what has become a complex jumble of tax breaks and incentives for small business, creating fertile ground for tax experts to exploit – sometimes in ways that do not promote the small-business growth and job creation that governments had in mind. Toss in the string of federal and provincial corporate tax cuts over the years, which have opened a wide chasm between small-business and personal tax rates, and incorporation has become an increasingly attractive option – particularly for high earners seeking to shelter income from the tax man.
Now, Ottawa is trying to put this tax-sheltering genie back in the bottle with its controversial proposals, which rest on three planks. The first would limit a business owner’s ability to “sprinkle income” among family members who do not work for the company. The second affects a business owner’s ability to convert income to capital gains, which are taxed at a lower rate. And the third would restrict the corporation’s ability to take cash out of the business to make so-called passive investments in outside assets, such as equities.
Joe Camillo, who owns Niko Apparel Systems in Hamilton and co-owns rowing company RegattaSport, echoes the sentiment.
“I don’t have a pension plan,” Mr. Camillo said. “The future for me versus a salaried employee with a benefits package is very different. So why shouldn’t I have some of those advantages, like not being that taxed on my passive investments or not having to worry about passing on an exorbitant tax burden to my kids if they want to carry on the business?”
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