Finance Minister Bill Morneau’s proposed tax changes have the potential to seriously impact Canadian business owners and entrepreneurs. Under the new stringent rules, the government plans to tighten in three areas in which business owners currently reduce taxes: income splitting with family members, the use of passive investment portfolios within a private corporation and the conversion of a regular income into capital gains.
“We had been given a heads up on what was happening so I wasn’t too surprised by some of the proposals, but I was absolutely astonished at the almost draconian level that some of it went to,” says Jason Pereira, Senior Financial Consultant at IPC Securities Corp. “The government has gone to a level I never thought they would.”
Although Pereira can see the sense in clamping down on the conversion of a private corporation’s regular income into capital gains, he’s sees the other two proposals as being “ridiculous and completely counter-intuitive”.
“I do not see any semblance of economic responsibility from this government, both on the economic and federal level, and frankly someone has to pay the bill,” Pereira says. “How many times are they going to kick business owners and entrepreneurs in the teeth in the next couple of years? We are now dealing with 53% marginal rates in Ontario and rates north of 50% in 7 out of 10 provinces. The term ‘fair’ is propaganda.”
As part of the proposed changes, the government wants to extend the taxation on the income splitting act – often known as the ‘kiddie tax’ – to anyone under the age of 25. They also want to introduce a ‘reasonableness’ test to determine how involved a family member is with the business that compensates them. It appears as though the test would have no schedule or scale to determine what is reasonable; it would be left open to the interpretation of an auditor.
“Entrepreneurship is the driver of any capitalist economy – something like 48% of the labour force in this country work for a company of less than 100 people, which were started by people who took an enormous risk with their financial future,” Pereira says. “The average entrepreneur is not earning much more than the average non entrepreneur, so these tax saving strategies helped to support their ability to work long hours and late nights.”
Under the new proposal, gains accrued in a company’s shares while they’re in a trust will no longer qualify for the capital gains exemption. Pereira believes this will force many companies to restructure because, under the current rules, a business owner could pass shares onto their heirs or spouse but still maintain control of those shares. The new laws would force business owners to give up control.
“The government is telling entrepreneurs that there are no privileges to entrepreneurship – not a single tax break,” Pereira says. "If you want to pass on that business to the next generation the only break is the capital gains exemption, but that is a maximum saving of $200,000.”
“People are building businesses and contributing to the economy but only get a tax break of $200,000 regardless of how valuable their business is – it’s ridiculous. There were things the government could have done that were not as bad, they really went for the jugular.”