Thursday September 07, 2017

How proposed changes to Canada's tax system could hit small business

Prime Minister Justin Trudeau says he makes 'no apologies' for the proposed tax changes that will affect small business.

Prime Minister Justin Trudeau says he makes 'no apologies' for the proposed tax changes that will affect small business. (Graham Hughes/Canadian Press)

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The Liberals have been getting an earful from the Conservative Party, small business owners and other critics on their proposed changes to Canada's tax system.

But Prime Minister Justin Trudeau  is making "no apologies" for their new tax plan and believe it will address "unfair tax advantages."

In a nutshell, the tax plan takes on these three main areas: 

Income Sprinkling 

Income sprinkling allows business owners to lower their tax rate by splitting their income with family members in lower tax brackets. 

Capital Gains 

Another reform will target people who claim regular business income as capital gains which are taxed at a lower rate.

Passive income

Limiting so-called "passive investment income" which basically involves taking cash out of a business to invest in things like stocks or real estate, rather than reinvesting it in the company.

The proposed tax changes were first announced by the government back in July.  

Many small business owners say the tax changes would create collateral damage and stifle entrepreneurship.

But David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives, doesn't buy that argument.

"The idea that small businesses are somehow going to shut down because they can't income split with their spouses and children is a bit hyperbolic to me," he says.

"Hopefully small business owners are in business because they think that they have a good product and a good service and they can make money selling that product and service, not because they think they can reduce their taxes."

But small business owner Chris Struthers in Penticton, B.C., says Macdonald's argument doesn't reflect his experience.

He says even with a good product and service people want to buy, there's still a risk starting a small business, and tax breaks are modest, at best.

Finance Tax Corporations 20170718

The government will extend income sprinkling rules that currently apply to minors - colloquially called the 'kiddie tax' - to some adults. (Sean Kilpatrick/Canadian Press)

Furthermore, family physician Michelle Cohen from Brighton, Ont., argues workload and doctors with young families are ignored when it comes to income sprinkling.

"A significant number of physicians with young families who are now predominantly women work long and irregular hours that really are not comparable to any other professions, or any other area of work in Canada. And many of them have child-care needs that cannot be met by traditional child care," she tells The Current's Anna Maria Tremonti.

"It's really just a recognition of the domestic and child-care labour that these partners, the spouses who are now increasingly men, are doing," Cohen explains, referring to stay-at-home dads.

Vegetable farmer Mark Wales from Aylmer, Ont., tells Tremonti the plan is "creating tax chaos."

The new rules will make it extremely difficult and costly for his daughters and their families to take over the farm, says Wales.

"The children who are actively involved in the farm will have to ... face what's called the reasonableness test for any dividends they might receive," Wales explains.

"So the onus is going to be on them to prove that they have actually either earned any income they receive, or made an investment, or taken some risk in the farm."

Listen to the full segment near the top of this web post.

This segment was produced by The Current's Willow Smith and Kristin Nelson.