Canada’s Finance Minister Bill Morneau released a plan to end what he calls “unfair tax advantages.” He says that his proposed tax changes, the most radical in 50 years, are about “fairness.” Some Niagara businesses see it differently.
Imagine two individuals, both earning $80,000 per year. One has a comfortable salary with four weeks’ vacation. He has a generous pension and he knows he’ll get a raise next year. The other had to invest $250,000 of her own money to start a business. She needed to pledge her personal assets, her house and car as collateral for an operating loan. She has five employees whose livelihoods depend on her, and if nobody wants her services next month, she doesn’t earn a cent.
Who would begrudge a business owner the ability to invest her profits and earn a decent return after paying corporate income taxes, especially when her savings may be needed to sustain her business through a dry spell? After all, she’ll be taxed at the same personal rate as everyone else when she withdraws the money from her business.
Ottawa says it’s unfair to defer income like that, and they are proposing to impose a high tax rate on profits not reinvested in the business. The Finance department has also coined a new term, income “sprinkling”. It evokes an image of sums of money given to family members. The reality could not be further from the truth.
There is hardly a farm or restaurant in Niagara that doesn’t have family members working there. These farms and businesses can now expect the Canada Revenue Agency to assess their family members’ labour contributions to determine the “reasonableness” of salary and dividend income. In a small business, it’s often the spouse who answers the phone, helps write marketing material, meets customers, pays bills, solves problems, cleans up and does any of the fifty other things that are needed. What is the appropriate salary or dividend such an indispensable person deserves?
Finance expects to pull in an extra $250 million by imposing higher tax rates on “unreasonable” payments in family businesses. That means that CRA will have to tax a billion dollars of income and audit hundreds of thousands of businesses. This potential administrative nightmare for government and business owners alike, would divert valuable resources away from things that really matter – like economic growth.
Business owners agree that loopholes in the tax system need to be closed and they want to see a fair tax system. In this case, we urge the government to collaborate with key stakeholders on this tax proposal. When the government does, they will have the support of business in designing measures that clamp down on tax evasion without sideswiping entrepreneurs and discouraging job growth. There is value in having an open discussion about how Canadians are taxed and how to support business growth. Let’s start that dialogue.
Mishka Balsom is the CEO and President of the Greater Niagara Chamber of Commerce. This column was prepared in partnership with the Canadian Chamber of Commerce.