In August, the news broke that proposed changes to how private corporations are taxed could have a wide-reaching impact on small businesses, including incorporated farms and professionals. The federal government is pitching the changes as being aimed at high income individuals using a corporate structure to obtain tax advantages meant for hard working small business owners trying to create jobs and grow the Canadian economy.  The opposition party and groups representing all types of small businesses have come out strongly opposed to the changes, saying they will mean higher taxes and discourage entrepreneurship.

I’ve spent most of the last month trying to figure out exactly who is right and what the changes will mean. I’m still not entirely sure, but I think their vagueness is one of the major problems. The government has said that they want to target those, often professionals, who are more employees than true small business owners, and for whom incorporation allows them to pay less taxes than their neighbour who is doing a similar job but being paid as an employee.  I don’t have a problem if this were the only group of taxpayers who would be impacted, but it’s not. 

The proposed regulations take aim at income sprinkling, passive investments held by corporations and the conversion of income into capital gains. For the majority of businesses, these aren’t loopholes but legal business practices. They are clouded in uncertainty. They use poorly defined words which will be left up to the CRA, and ultimately the courts, to interpret and define. Just how much of what kind of work does a family member need to do to be eligible to receive dividends on corporate income without an added punitive tax? What about a small investment in an associated business, that the investor isn’t actively involved in?

Tax planning is an important part of succession and estate planning and it’s unclear what will happen to arrangements made under the regulations in place last year. Some of these could very well be made obsolete, effectively making the changes retroactive. Many firms have suspended tax planning while they wait for more clarity on what the final regulations will include.

The government is calling the changes minor, but tax professionals are saying they are the biggest changes since 1972.  The changes that came into effect in 1972 followed consultations that began in 1966 and included a Royal Commission led by tax professionals.  The changes currently being proposed were given a 75 day consultation period, most of which fell over summer, and were drafted without significant input from tax professionals, either accountants or lawyers. Those who could best help craft and advocate for the new rules weren’t involved in their creation.

It isn’t just that industry doesn’t know what’s going on, the government doesn’t seem to either. The government estimates that changes to income sprinkling will net them about $250 million in revenue and impact about 50,000 Canadian families. For comparison, the new middle school addition to be built in Neepawa is expected to cost $10 to $14 million and the 2017 federal budget was about $304 billion. For the government, this isn’t a lot of money. As for the other two components, the government has said it has no idea how much money will be raised.

I can’t help but wonder what the government was thinking. Sure, there may be some unfairness, but how big a problem is it?  Worth drawing very vocal criticism and uniting such a wide range of groups when the payoff is so small and uncertain?

It might be time to look at updating the rules— a lot has changed since 1972— but the changes should be done right. This plan has created an unnecessary amount of uncertainty and confusion that does nothing to help the Canadian economy or those middle class small business owners about whom the government professes to care so much about.