Finance Minister Bill Morneau’s proposed tax changes that would go into effect in January 2018 retroactive to July 2017, could quite literally stop Canada. Under the guise of equalizing tax burdens, what the government has done is take dead aim at small corporations that account for some 80% of Canadian jobs, and take away any incentive for them to invest and grow and create more jobs. Morneau’s plan would hurt working men and women most, and the advice from every major tax advisor and accounting firm in this country to their personal corporation clients has been to hold back investments until this law is changed or move offshore fiscally.
What the government is proposing can best be illustrated with the following example from the government’s own literature. A salaried employee earning $220,000 annually pays $25,000 more in income taxes ($79,000 vs $54,000) than an incorporated consultant earning the same amount. Whatever investment profits are realized which are funded from the after-tax business income, by both, are taxed at the same rate. What Morneau is now proposing is that any profits a small businessperson — owner/operator or consultant earned through their private corporation- makes on that $25,000 difference would now be taxed at an effective rate that would claw back almost all profits upon distribution to the individual shareholder, according to Jeremy Levi, CPA of the firm of Levi & Levi. That giant sucking sound you now hear across the country is the total elimination of any incentive for small businesspeople to invest and create jobs.
Why is the government doing this? Because the Prime Minister’s election pledge of running $10 billion deficits for a few years has been flushed. Canada has gone from surplus under Prime Minister Harper to a $68 billion deficit under Prime Minster Trudeau. A deficit that is going up to some $81 billion in the coming March 2018 budget and the government is desperately searching for a way to avoid general, across the board tax increases. So they have chosen the path of near class warfare.
Part of the Trudeau government’s argument is that incorporated professionals under current tax rules have an unfair advantage over salaried workers. Yet that argument ignores the fact that small businesspeople and professionals have no EI, or pensions or paid vacations or benefits. They take risks to open businesses and create jobs. Furthermore, EI, QPP/CPP, QPIP & QHSF are funded by the employers themselves. The average wage levy tax is around 10% of the payroll. Full-time salaried employees get sick days, vacations, medical insurance and sometimes pension plans with benefits at least partly paid by their employer.
By contrast, incorporated entrepreneurs and professionals have to provide their pensions and benefits out of their own pockets, as well as funding the expenses of running a business, which is why they have historically received a lower tax rate. As an example, Dr. Charles Shaver, chair of the Ontario Medical Association’s section on general internal medicine, said Morneau’s proposals were unfair to the OMA’s 29,900 doctors — 69% of whom are incorporated — because the OMA negotiated the right to incorporate in lieu of fee increases with the Ontario government. Now, he said, the feds want to arbitrarily change the rules. In a July 28th memo to Ontario doctors, OMA President Shawn Whatley warned that Ottawa’s proposed changes, “could create a 73% effective tax rate on the earnings from investments held inside professional corporations. And this would be on top of other changes the Trudeau government is considering including eliminating income splitting, lowering the deductibility of tuition for children in college and extending the restriction against income-sharing with minor family members to include family members aged 18-24.
The reality is that of the 11.6 million Canadians employed in the private sector, 8.2 million are employed by small businesses. Not just doctors but plumbers, electricians, roofing companies, restaurant owners, landscapers, coffee shops, florists. These are not champagne-drinking, cigar-smoking people of privilege but hard-working Canadians who structured their lives under existing tax rules and are now having the rules changed on them — and retroactively at that.
The tax considerations Morneau seeks to repeal have been recognized by successive governments as necessary incentives to help small businesses succeed and spur job growth. If these measures are adopted, they will mean less revenue and with that comes the prospect of layoffs, fewer working hours, and reduced health insurance and other benefits. Almost every major accounting firm has sent out advisories to its clients stating that if these changes are implemented, small businesspeople and incorporated professionals should stop investing or try and get their holding companies established offshore until a new government overturns these measures. These are real the consequences of what the government is proposing. They will bring much of Canada to a screeching halt.