Tax changes will harm family enterprises

Significant tax reform is being proposed for small and medium businesses in Canada.  We think these changes will be detrimental to many family enterprises, and we wanted you to know that we’re now organizing with many of our industry partners, advocating for a more thoughtful and reasoned approach to the proposed legislation.

THE BACKGROUND:

The Liberal government introduced legislation on July 18 that will significantly change how private business corporations are taxed. These are the first substantive changes since the capital gains tax was introduced in 1972.

1. The changes focus on the concepts of income sprinkling, the use of the lifetime capital gains exemption, earning investment income in a corporation, and removing value from a corporation by means of capital gains taxed at lower rates.
2. The proposals also affect trusts that hold shares in corporations and the beneficiaries who eventually become shareholders.
3. Specifically, they will increase capital gains on death for persons who hold shares of private corporations to as much as 45%, rather than the 26% payable on capital gains of public corporation shares.

WE ARE DISAPPOINTED WITH THE PROPOSALS FOR THESE REASONS:

1. We believe family enterprise is Canada’s engine. Small and medium sized businesses are the backbone of our economy. These business families create most of the jobs in Canada, build necessary infrastructure, and contribute in significant ways to the communities where they live and work. (We even commissioned independent third party research to prove it.)  The government’s tax proposals are like a punch to the gut. They send a negative message to current and future business owners about the importance of their role in our economy. Read more here from the Canadian Federation of Independent Business.
2. It’s misleading to equate business owners with salaried employees. Owners take significant risks in running their businesses. In our view, the tax treatment of a business family shouldn’t be benchmarked against salaried employees that assume no such risks, and instead enjoy the benefits of labour laws, employment insurance, and other mechanisms. The current federal tax system allows business owners to use corporations and legitimate tax planning in recognition of their risks. This system has been in place for decades and we believe it’s inappropriate to infer that owners are exploiting “tax loopholes.” Instead, our tax system should support owners for the contributions they make to our economy and the sacrifices they take on for their employees and communities.  (Some useful background, including a ‘real life’ example, is here.)
3. Inter-generational business succession will become even more difficult. The tax rules for the transfer and sale of a family business currently favour selling to an unrelated third party (such as a private equity fund) instead of transferring the business to a daughter or son. This is unfair and punitive, and has been a sore point with business owners for years. To his credit, Finance Minister Morneau has invited views on how to better accommodate genuine inter-generational business transfer. Unfortunately, the new rules (specifically those related to capital gains), will make business transfers to family members even more difficult and could even lead to double taxation of some estates.
4. We believe significant tax reform deserves a more thoughtful, consultative process.The proposals released by the government on July 18 will fundamentally change the way private business is taxed in our country.  We are open to the possibility that review and reform of our tax system may be appropriate, but it should be conducted in a more fulsome manner with reasonable study and dialogue. A 75-day consultation period is just not appropriate, as this piece by tax expert Kim Moody clearly articulates.

Our own business enterprise is small. We each work hard, as others do, to build a better future for ourselves, our families, our employees – and those coming after us. We offer our employees competitive benefits as well as profit sharing to encourage them to build for their own future. In our years in business we have each invested in various business ventures. Not all have been successful, while others have worked out well.

All of these things are part of business and ownership.  Now, we fear the proposed tax rules might cause some business owners to perhaps sit back and avoid further risk. This attitude is not what built Canada over our 150 years.

It’s our hope that these proposals are more thoughtfully considered (and debated) before they become law. Otherwise, they will have a detrimental impact on the owners of private corporations in Canada, on our overall business climate, and on our country.

You can be assured we will keep you apprised of our advocacy efforts on behalf of all private businesses in Canada,

Peter Creaghan                            Marty McConnell                         Bob Gould

Partner                                            Partner                                                   Partner