By Trevor Busch
Recent small business tax changes proposed by the Trudeau Liberals were the focus of a roundtable discussion with Bow River MP Martin Shields last month.
The tax changes, originally proposed in July, targeted income sprinkling, passive income, and capital gains which could impact the transfer of generational farms.
“There’s been some proposed legislation out there that could have some consequences,” said Shields, speaking during the roundtable discussion at the Taber Legion Hall in mid-October. “The challenge is that we don’t have the final document. They brought this out on July 18 — when we all don’t have anything to do but follow proposed pieces of legislation, in the summertime, because we don’t take holidays and we’re not working — and then it extended into the harvest time, and it’s been a challenge in the sense of getting people aware of it to start with.”
Fielding numbers questions from the small crowd of concerned constituents, Shields encouraged everyone present to consult with their accountants on the financial implications of the legislation pertaining to their own specific circumstances.
“In private sector employment, 71 per cent comes from small businesses. These are the job creators. There’s been the discussion out there that this tax change is about the rich, the one per cent. When you’re talking about small businesses, two thirds of them earn less than $73,000 per year. That’s after you’ve paid your employees, after you’ve paid all your expenses. A lot of small businesses just don’t have a lot of cash at the end of their tax year. And half of those earn less than $33,000. So when they’re talking about the rich, it’s not the small businesses they’re talking about.”
Draft tax legislation that would restrict the conversion of dividend income into lower-taxed capital gains was one of the proposals made by Finance Minister Bill Morneau in mid-summer, and also included a draft bill to restrict the use of income sprinkling among family members as a way of paying less overall tax.
“One specific change they’ve talked about is the income sprinkling,” said Shields. “We’re talking incorporated small businesses — which a lot of small businesses are, and a lot of ag businesses. It means that in your business the primary person, whether it’s you that owns the business, there’s other people involved in that business operation that aren’t the name that the business owner might be. So if you’re an ag business, you may have the one person that’s the business, but you may have the spouse who also is involved in making a lot of decisions about that business.”
As part of recent Liberal backpedalling on the legislation after an outcry from Canadians, recently Morneau announced that the income-sprinkling provisions would not affect the lifetime capital-gains exemption.
“Sprinkling means that you can share some of that income with those other people in that business that are not the primary business owner that’s identified. So the part that they’re proposing in here — because they’ve called this a loophole. It’s not a loophole, it’s the Tax Act. It’s a piece of legislation — this isn’t a loophole, and people have used it to plan by, some for decades. So this ‘reasonableness test’ gets to be really interesting. Because under proposed, it isn’t defined what ‘reasonableness’ is,” said Shields.
The level of documentation required to be completed under the Liberal’s originally-proposed plan would have been insurmountable, added Shields.
“That’s why we believe it’s a bureaucratic nightmare; one, for the business owner; two, for the person that’s going to come check it. But for most small businesses that’s a tough piece. If you’re talking a family-type of operation with sprinkling, that’s going to be a challenge.”
A third, less-developed proposal from July aimed to curb the use of incorporated small businesses as a vehicle for making passive investments – such as company stocks – that are unrelated to the business. Also recently, Morneau said the government will not be moving ahead with the draft bill on converting income into capital gains.
“What this particular piece says is passive income is income that is there more than one year, or you’re going to get taxed at a higher rate,” said Shields. “The government has said to us they want to encourage people — small businesses — to spend their money every year. The passive income (impacts) will depend on how you organize your financials.”
M.D. of Taber Reeve Brian Brewin commented that many of the proposed tax changes have big financial implications for his constituents.
“This is a big issue for our area. It’s going to affect an awful lot of our rate payers.”
Shields explained that from the perspective of his party’s experts, the tax changes are simply a transparent attempt at an easy tax grab.
“Why are they doing this? We’ve got some tremendous accounting-type people in our caucus, and they work with outside people. They believe the government believes there’s billions sitting in passive income, and they want to tax it and get that money now. They’re spending at a phenomenal rate — they said they were going to spend about $10 billion over, they’re $20 billion — they need money and they know it. This is a way to get it now.”
Shields noted that some of his constituents are now investigating shuffling money to offshore foreign accounts in an attempt to make an end run around the legislation before it can impact their bottom lines.
The July proposals included a consultation paper that suggested there are long-standing concerns that shareholders of corporations are currently ineligible for the lifetime capital-gains exemption – which is $835,716 for shares of a qualified small business or up to $1-million for qualified farms and fishing property – when they sell their shares to a corporation owned by their adult children.
“If you have made a plan to transfer that to the next generation, and the next generation is going to pay you for it, this will be taxed at a higher rate,” said Shields. “If you give it to your children, you’re fine — but do you want to be homeless, or don’t plan to get anything out? There’s a lot of businesses out there that have planned this as a way of retirement. The land is the retirement, and that in the ag sector is huge, because the land can be a retirement plan, and selling it to the next generation is part of that retirement plan. But if you sell it to a third party, it’s about 30 per cent less taxes that you pay.”
Playing damage control in the wake of organized resistance to the changes, Morneau announced that the small-business tax rate will be reduced from 10.5 per cent to 9 per cent by 2019 and that the proposed restrictions on passive investment in an incorporated small business will be changed to allow for up to $50,000 a year in passive investment income, which is equivalent to a 5-per-cent return on assets of $1-million.
Shields encouraged constituents to keep up the pressure on the Liberal government for more changes to the legislation.
“As MPs, we have been on the government’s case, day after day. But it takes a long time for the media to start paying attention to things, and you sometimes just have to be repetitive, repetitive. In the last week (early October) the media has been paying attention to this one, and focusing on the real stories about people.”