Proposed Tax Changes Remain an Ongoing Battle

Federal Finance Minister Bill Morneau is being widely criticized for not meeting with the Canadian Federation of Independent Business (CFIB). Why he chooses not to accept direct input from CFIB which represent 110,000 small- and medium-sized business is puzzling, especially in light of the ongoing issues tied to his government’s proposed tax changes.

This time last year, these federal tax proposals were on everyone’s mind. Announced in the summer of 2017, the proposed rules set off a firestorm among small business owners. Being the most drastic reforms to small business taxation in decades, the response was months of sustained fury.

As a result of the pushback, the Minister pivoted, cobbling together a package of concessions in October. Some of the proposals were diluted, including a full retreat on changes to capital gains which were shelved indefinitely. The government also re-announced a promise to lower the small business tax rate in an effort to vent some of the steam from a pot of anger which was boiling over, threatening to irreversibly scuttle the Liberal’s position as champions of the middle class.

While these changes were welcome, signs the government was actually listening came to a screeching halt by December when it announced that it would move forward with its plan to restrict the way owners share business income with family members. Particularly exasperating was the announcement was made just weeks before the changes took effect on Jan. 1, 2018.

Unless a business owner is a tax professional or an accountant, the complexity of these changes will leave most in the dark as how to respond. Many won’t discover their vulnerability to these new rules until they are unlucky enough to be audited a year or two down the road.

When the  2018 budget was unveiled, CFIB was looking for details on the last monetary grenade in the proposed reforms: changes to the tax treatment of passive investment income. These investments are important for smaller firms as they serve, in essence, as an insurance policy against tough times. Many use passive investments, for example, a rental property, to save for future big capital purchases or expansion.

The new rules will see business owners lose access to the small business tax rate once they exceed a certain threshold. If a business earns more than $50,000 per year from passive investments, they will begin to lose access to the lower small business tax rate on their regular, active business income. And if they have more than $150,000 in passive investment income, the Canada Revenue Agency (CRA) will view them as a large corporation and tax accordingly.

To put this in perspective, a small business owner in Newfoundland and Labrador has told us he will be paying $80,000 a year in higher corporate income taxes. It’s not hard to imagine the impact on businesses in Atlantic Canada already shouldered with high taxes, stifling regulation, labour shortages and a high cost of living.

While recognized as a better approach than the mayhem first proposed, it none-the-less remains a confiscatory tax hike for small firms. Lost in the new approach is the promise the government made to grandfather those who had already built up passive investment income. It’s is true the passive investment income itself will not be taxed at a higher amount under the new model but business owners will now be forced to pay tens of thousands in higher taxes on their active business income.

Combined with new rules on income-splitting, these changes will result in $1 billion headed to the treasury from small business owners. Or at least that’s what the government says. In reality, it looks like the government is underestimating its haul. The Parliamentary Budget Officer (PBO) reports the new revenue from income-splitting may be two or three times what is being suggested.

However, none of this is clear. The PBO noted they, “cannot clearly identify the individuals who will be subject to the (income-splitting) rules.” If those folks and the staff at the Department of Finance can’t agree on who the rules impact and how much they cost, God forbid when CRA gets a hold of this.

The muddled thinking hits at a particularly bad time for Canadian businesses. Energy bills are on the rise thanks to carbon taxes, and firms in many provinces are facing massive hikes in minimum wages and costly new labour laws. And don’t forget, business owners and employees will be seeing higher CPP premiums starting next year and the following four to six years.

So while we’ve made some minor victories, it’-s time for the Finance Minister to listen to the concerns of the nation’s entrepreneurs. It’s not too late as these changes are still winding their way through Parliament.

Specifically, the government needs to listen to owners whose spouses have put so much into the family business and who deserve some recognition. As we have said from the outset of this battle, they should be exempted from the income-splitting restrictions. Government also needs to allow business owners more time to adjust to  new income sprinkling rules. Pushing implementation of these rules to Jan. 1, 2019 would give business owners and the CRA time to ensure everyone gets this right.

On passive investment income, a solution needs to be found to allow those who have built investments already – to be exempted. CFIB and the Coalition for Small Business Tax Fairness remain ready to work with Minister Morneau and the Department of Finance to find ways to do this without choking small business with new complexities and paperwork.

So the battle for tax fairness for small business owners continues. Atlantic Canadian small businesses are currently represented in Parliament exclusively by Liberal Members of Parliament. If the Finance Minister is unwilling to meet with CFIB, are you listening?

Jordi Morgan is Vice president Atlantic of the Canadian Federation of Independent Business. CFIB represent the views of 11,000 small and medium-sized member businesses across Atlantic Canada.