August 28th, 2017, Hamilton, ON: The Hamilton Chamber of Commerce is calling on Canada’s Department of Finance to reconsider the small business impact of its sweeping “Tax Planning using Private Corporations” legislative proposals. Chamber members across Canada and many business experts firmly believe that the proposals could have could have a significant impact on many Canadian businesses and economy: potentially raising taxes, increasing the administrative burden on SMEs and heightening the impact on family-run businesses.

In 2015, small businesses employed more than 70 per cent of Canadians who work in the private sector. They also account for 27 per cent of total research and development expenditures by spending $13 billion between 2011 and 2013. The foundation of all advanced economies is based around encouraging entrepreneurship and risk taking. In order to encourage value creating investments, emergency funds and in order to recognize a business owner’s ineligibility for pension funds, employment insurance, and other social nets, the governments universally offer tax programs differential to those on employment income.

While the proposals affect all 1.8 + Million corporations in Canada, the Government’s consultation overview states that “The Government is asking Canadians what actions should be taken to ensure that high-income individuals cannot use strategies involving private corporations to gain unfair tax advantages.” and that “…the current tax rules provide opportunities for those who own private corporations to legally, but unfairly, obtain tax advantages that are not available to other Canadians. ”

The proposals focus on three main areas that the federal government suggests are providing unfair tax results to Canadian taxpayers:

1. Income sprinkling (splitting) using private corporations – eliminates the ability to split income from one high-income earner paying tax at high personal tax rates to another family member that has low income and is paying tax at lower marginal tax rates when the other family member is not active in the same business. This is interpreted to include dividends and capital gains, including the ability to multiply the capital gains exemption using a family trust.
2. Holding passive investment portfolio inside a private corporation – Finance is looking to eliminate the ability to defer taxes on passive investments inside a corporation. There is a significant tax deferral when a private corporation uses after-tax corporate dollars to invest in passive investments inside a corporation compared to the after-tax personal dollars an employee has to invest. The proposals do not affect a corporation that reinvests the after-tax profits back into the business.
3. Converting a private corporation’s income into capital gains – effective July 18, 2017, a draft legislation has been prepared to prevent the tax strategy of converting of dividend income into capital gains. Capital gains are taxed at lower rates than dividends. Many businesses consider Capital Gains to be an asset within intergenerational transfers and exit sale of a business. Instead of each family member holding a direct or indirect share getting an exemption of up to $835,716, the proposal might limit it to a single representative.

“While messaging within the media has been focused primarily on “high-income individuals” and professionals who are currently eligible to utilize these policies, we believe a “one size fits all” approach will be damaging to thousands of legitimate small business owners and the millions of people they are responsible for employing,” said Keanin Loomis, President & CEO of the Hamilton Chamber of Commerce. “We’ve heard unanimous concern and anger on these proposals from many small businesses who operate as a family run enterprise,” added Loomis.

Additional concerns were raised by the Canadian Chamber of Commerce, particularly around the cost benefit impact of a proposal, which in its attempts to pull in $250 million in revenue, will have to tax over $1 billion in salaries, audit and litigate hundreds of thousands of businesses while making the tax code even more complex. Many businesses are also concerned that these proposals add to the cumulative regulatory burden, where these changes come in parallel with rising electricity costs, carbon pricing, minimum wage and other labor costs in Ontario, in addition to the cancellation of previously proposed small business tax reductions.

The Department of Finance will be collecting consultation submissions until October 2, 2017. The Hamilton Chamber and local businesses will be engaging government representatives over the next month. Local businesses are also encouraged to get in touch with the Chamber and their Members of Parliament to share their testimony. The Chamber is also working with Liberal MP’s and the Ministry of Finance to host consultation meetings.

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For more information, please contact: Huzaifa Saeed | Policy & Research Analyst | Hamilton Chamber of Commerce | t: 905-522-1151 ext: 230 | e: h.saeed@hamiltonchamber.ca

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