July 18, 2017 Draft Legislation
Friday, September 22nd, 2017
An open letter to:
The Honourable William Morneau
The Right Honourable Justin Trudeau
Mr. Nathaniel Erskine-Smith, MP Beaches East-York
Re: July 18, 2017 draft legislation
My clients are upset and I am upset too. My clients are hard working entrepreneurial business owners – the very lifeblood of our Canadian economy. They are not rich. They do not fall into the 1%.
Your recent tax proposals treat these hard working businesspersons like tax cheats and suggest that they are taking unfair advantage of tax loopholes. This is simply not the case. These entrepreneurs employ many Canadian employees, pay corporate taxes, pay personal income taxes, collect and remit HST on behalf of the federal and provincial governments, match Canada Pension Plan deductions, match 140% of Employment Insurance deductions, deduct and remit federal and provincial payroll taxes, and pay into provincial health plans like Employer Health Tax and workplace insurance programs like workers’ compensation.
Your draft legislation was presented in the height of summer and announced a bogus consultation process that has been undermined by the continued assertions of Mr. Morneau and Mr. Trudeau of “not backing down.” How could a Federal government commit to a consultation process with the adversarial view of “not backing down?” Why the hurry? What is the importance of ending this process before October 2?
Here is the crux of the issue: Federal and provincial governments across Canada have created a structural problem of high personal tax rates and lower corporate rates. I would argue they have done this annually and purposefully for many years as a matter of policy choice.
Higher personal rates have been celebrated as a tax on the rich and the 1% – I would propose to you that they are a tax on the middle class and a direct attack against my entrepreneurial clients. The highest rate in Ontario has gone up by a factor of 16% from 46.41% to 53.53% from 2015 to 2016. The new federal marginal tax rate of 33% introduced in 2016 – caused personal tax revenues to actually decrease by $1.2 billion in 2016.
Corporate tax rates have declined to 15% or 26.5% in Ontario. But that is not the whole story. The after tax profits earned by entrepreneurs are trapped in their corporations. They are trapped inside these corporations because to pull these funds out, the tax hit is as much as 45.3%. The structural problem of high personal tax rates and low corporate tax rates creates an incentive to defer the recognition of personal income.
Entrepreneurs retain corporate funds for many purposes including: saving for a rainy day or an economic downturn, retirement, or to meet financial covenants set by their banker. This isn’t a loophole. This is a way of life for the entrepreneur.
Your proposed solution for ending the refundable tax regime on investment income will cause the tax rate for many of my retired clients to exceed 73%. These are successful entrepreneurs who are now second guessing their retirement and sale of their businesses because they could not in their wildest dreams envision Canada would levy a 73% tax on their retirement incomes. How could they pay 20% more than the highest personal tax rate?
Here is my solution:
- Commit to an honest consultation process with no arbitrary timeline.
- Understand the ramifications of the structural problem of divergent personal and corporate tax rates.
- Understand that employees are very important but they are not business owners and they cannot be treated equally.
- Listen to the guidance of professional firms, the Society of Trust and Estate Practitioners the Canadian Chartered Public Accountant Association.
- Keep it simple.The current draft legislation is almost incomprehensible – help me understand what “an accommodating third party that purportedly deals at arm’s length” & means (ITA 246.1(2)?)
My clients take entrepreneurial risk, have few safety nets, and often risk their family homes to add value and create futures for themselves and for the employees that they lead. Don’t castigate them as tax cheats and exploiters of loopholes – they aren’t – they are the lifeblood of our Canadian economy and without them Canada is in big trouble.
Kalin L. McDonald, CPA, CA