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Recent Proposals to Amend the Income Tax Act

Tuesday August 8, 2017

Dear Mr. Morneau,

I am writing to express my concern, and dismay, at the direction taken by the Government of Canada recently.  The draft legislation released last month, if passed into law, will siphon the fuel from the engine of the Canadian economy – small business.

The explanatory notes and background paper to the draft legislation make it clear that these proposals are based on the flawed assumption that business owners are no different than senior employees, and should not enjoy any differential tax treatment.  However, this assumption ignores the fundamental differences between an employee, who risks nothing to earn their wage, and a business owner, who often risks everything to provide employment for those employees, and hopefully, generate a profit.

Tax policy in Canada, has historically recognized this fundamental difference, and has provided incentives to entrepreneurs to take those risks.  These incentives are the very “loopholes” the recent draft legislation and consultation paper aim to eliminate.  The small business deduction, and the reductions in the general corporate tax rate over the past 25 years, have contributed to tremendous growth in Canadian economic activity, by rewarding entrepreneurs for taking risks, and succeeding.  The ability to reinvest 75-85% of business profits (after the payment of 15-25% corporate income tax), allows entrepreneurs to hire more employees, invest in new technology, and grow the economy.  When entrepreneurs choose, for various reasons, not to invest all of these profits in growing their own business (perhaps because of market saturation, or the desire to diversify risks), they invest in other businesses.  These passive investments also contribute to the growth of the Canadian economy, since the invested funds become part of the capital base for public companies.

The changes to section 55 passed by this government in spite of the feedback provided by the professional community, served to make it extremely difficult for entrepreneurs to protect their assets through the historically accepted practice of paying dividends from an operating company to a holding company.  The draft legislation introduced last month introduces a “reasonableness” test for dividends (a concept the Supreme Court had previously rejected), and expands the “kiddie tax” to adult relatives, including aunts, uncles, nieces and nephews – persons who have not previously been considered related. Now, the government is seeking to eliminate the fundamental principle of integration which has been a foundational concept in Canadian tax policy from the outset.

In summary, the policy direction of this government will drive small business out of this country, by eliminating the fiscal incentives to create jobs and strive for success.  Why should we risk our homes, and our financial futures, if the reward for success is that we have the “privilege” of handing more than half our profits to the government, and then paying double tax on any investment income generated by the profits that remain?