Recent musings about the federal tax changes by Finance Minister Bill Morneau are causing significant anxiety for small business owners. In talking with business owners from all levels, there is worry, frustration, and in some cases anger.
In Atlantic Canada, we feel it more than most other areas of the country. The cumulative tax burden is one of our biggest challenges. With new changes proposed by the federal government, it’s going to get worse.
The lower small business tax rate on the first $500,000 in corporate income remains vital to the success of many small firms. Now, big business groups, academics, and government officials are lobbying the government to limit access to it or eliminate it.
When running for office, the Liberals pledged to cut the rate from 10.5% to 9%. That hasn’t happened. These proposed changes will make things more difficult, especially for owners of smaller firms.
The idea is to make sure the wealthiest pay their fair share of taxes. Fair ball, but let’s not throw smaller businesses under the bus in the process. Unfortunately, the government appears to forget that the vast majority of independent business owners aren’t the 1%; they’re the middle class. Two-thirds of small business owners earn less than $73,000, half of whom earn under $33,000.
The Feds plan is to eliminate or restrict how some business owners save on taxes, including:
- Sharing income with family members;
- Saving passive investment income in a corporation; and
- Converting a corporation’s income into capital gains.
These measures are currently legal and are often used by independent businesses to reinvest, ensure the stability or save for the retirement.
Most worrisome is the proposal to make it difficult for small business owners to share income with family members working for them. The support of family members in formal and informal roles is often key to the success of a firm and any limitations could have significant unintended consequences.
On passive income, we know it is much more difficult to borrow money as a small business owner. A business’ passive income acts as insurance against emergencies and unforeseen costs. Business owners need to be able to rely on their investments – in their own business – to protect them against the risks of owning a business.
Also, as business owners don’t have the generous pensions available to public servants or giant salaries creating RRSP room. They need to depend on the value of their business, including any of its investments, for their retirement years.
These changes would come into effect in 2018.