Canada’s minister of finance wants to tax business savings. He wants to clamp down on people setting up companies in order not to pay tax. He says that his proposed tax changes, the most radical in 50 years, are all about “fairness.” As a former minister of national revenue, I fully agree that fairness is fundamental. The problem is that the changes he’s proposing simply aren’t fair.
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 her 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 it is proposing a 70-per cent effective 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 a Marie Antoinette type, sprinkling vast sums of money upon the heads of her over-privileged family members. The reality could not be further from the truth.
There is hardly a farm or restaurant in the country 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 determining 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 50 other things that are needed. What is the appropriate salary or dividend such an indispensable person deserves?
The finance department 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. Imagine the administrative nightmare for government and business owners alike, diverting valuable resources away from things that really mater — like economic growth.
No other country in the world has tried to impose such punitive tax measures on small business. Most want to encourage business formation, reinvestment and entrepreneurship. The tax changes the minister is proposing will hurt hard-working Canadians who take significant risks investing money to create legitimate businesses and the jobs, incomes — and taxes — they support.
No one wants to see individuals scam the tax system, but that is no reason to scapegoat legitimate business owners.
The government needs to rethink its tax proposals. If it does, it will have the support of business in designing measures to clamp down on tax evasion without side-swiping entrepreneurs and discouraging job growth.
That is why we urge the minister to shelve his hasty proposals.
Let’s have a frank and open discussion about how Canadians are taxed and how to support business growth. And the best way for the government to start a dialogue on tax fairness is to demonstrate that its own actions are fair.
Perrin Beatty, a former federal minister, is the president and CEO of the Canadian Chamber of Commerce.