Chamber meeting draws concerned crowd
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- Published on Friday, September 22, 2017
By Kate Jackman-Atkinson
The Neepawa Banner
About 35 concerned small business owners gathered in Neepawa last week to hear about how tax changes could impact their businesses.
On July 18, federal Finance minister Bill Morneau introduced proposed changes to the taxation of private corporations, which are expected to impact a range of small businesses, including incorporated professionals and incorporated farms. The information session, held Sept. 12, was organized by the Neepawa and District Chamber of Commerce and was led by Dauphin-Swan River-Neepawa MP Robert Sopuck.
The changes take aim at three practices which the government says are being employed by wealthy Canadians to reduce their tax bills. The proposal has been met with strong and vocal opposition from a range of small business owners concerned about the financial impact of the proposed changes.
The first practice is what’s known as income sprinkling. This involves diverting income from a high-income individual to family members with lower personal tax rates, or who may not be taxable at all. The proposed changes would impact family members who have no role in the business, raising the amount of taxes that they pay.
The second practice relates to passive investments held by corporations. Investing through a corporation doesn’t reduce the amount of tax paid on the proceeds of an investment, but merely defers it until the investment is taken out of the corporation. However, because the initial investment is made with net income that was taxed at a corporate rate, which is lower than it would have been if the money had been paid as a salary and taxed at the personal tax rate, it’s larger. The government is concerned about the added value created by this larger initial investment and the proposed changes would increase the tax rate to eliminate that benefit.
The final change relates to converting a corporation’s income into capital gains. Income, in the form of either salaries or dividends, are taxed at a higher rate and a series of transactions can convert this money into capital gains, which are taxed at a lower rate.
Many Canadian small businesses use these transactions for legitimate business, succession planning or estate planning purposes. Business owners are concerned that they will now face added taxes.
‘How do you plan for the future?’
The Conservative party, which forms the official opposition, has been strongly against the proposed changes and Sopuck made his party’s views and actions clear. “This has galvanized the business community across Canada… We [the Conservative Party of Canada] are four square against it,” he said.
Sopuck noted that he has heard from constituents with concerns about all three components of the proposed changes. He noted in particular that one small business owner relies on passive investment to tide their seasonal business over during hard times. “This is based on class envy,” he said of the proposal.
For many, the major concern isn’t necessarily the intention of the rules, but how broadly they have been drafted. The proposed changes note that they would be retroactive to July 18, 2017, when the draft legislation was released, but many also have concerns that the changes will impact transactions made in the past. “We do tax planning as per CRA regulations,” said business owner Perry Sneddon, adding, “If they go retroactive, how do you plan for the future? You can’t do that.”
Matt Bolley, a partner with with MNP’s specialty tax group, based out of Brandon, said at the Neepawa meeting that the government has said that there would be some grandfathering, but they haven’t said how, “It would be very complicated.”
For Bolley and his colleagues, the main concern is over how broadly the rules could be interpreted. For example, the draft legislation includes the word “reasonable”, which creates a grey area, leaving CRA and the courts to determine whether something is reasonable or not.
“They are broad rules and [CRA] can interpret them however they choose… The government says, ‘Don’t worry,’ but that’s not how it will play out,” said Bolley. He said that more people will be caught by the rules than were intended.
The other concern is the scope of the proposed changes. While the government is pitching them as minor, tax professionals counter that they are anything but. “This is the biggest change since 1972,” said Bolley. “[These changes] will stifle entrepreneurship, which is the backbone of Canada’s growth, all in a 75 day consultation period, when everyone is on holidays,” said Sopuck.
The consultation period is open until Oct. 2. Beyond submissions to the Finance minister, Sopuck also recommended that Canadians call Liberals MPs’ offices to express their concerns. “Don’t email, phone,” he said, adding, “You don’t need to talk to the MP, you can talk to staffers.” So far, the prime minister and finance minister have shown no signs of backing away from the proposed changes and Sopuck explains, “How we defeat it is by having Liberal MPs vote against the bill.”
