(As originally published on LinkedIn, 31 August 2017)
Entrepreneurs could bear the burden of next tax reform proposals
By: David Steinberg, EY Canada’s Private Client Services Tax leader
The Canadian economy needs entrepreneurs more than ever. Private companies employ the largest number of Canadians and create the most new jobs. They’re the economic engine that keeps our country afloat.
The draft legislation and proposals announced by federal Finance Minister Bill Morneau on 18 July, 2017, could impact entrepreneurs in a way that hasn’t been seen since the last major tax reform in 1972. The extent to which a business could be affected will vary, but undoubtedly, these proposals would fundamentally change tax planning strategies well into the future.
What are the impacts?
These proposed changes for private corporations would fundamentally change how they’re taxed, curtail tax planning opportunities currently available to family shareholders, and the ability of businesses to retain and invest earnings to protect against future challenges they may encounter. The Liberal government has indicated that it’s targeting loopholes “the very wealthy or the highest-income individuals” currently use to “avoid paying their fair share” of taxes. To be clear – the draft legislation would affect all Canadian entrepreneurs who are profitable, not just the ‘wealthy’ ones.
Entrepreneurs need a cushion for the future
Many owners of a private business will buy investments inside their business so that they can create savings for when times are hard, when they want to grow the business or to have enough income saved to fund their retirement. The ability to do so is extremely important. Many entrepreneurs and professionals have taken years out of their lives and have taken very significant financial risks to start and develop businesses and to elevate their education to earn a better income.
Entrepreneurs don’t have pensions, they don’t have government or other benefits and they don’t get Employment Insurance. Their relentless focus on the success of their businesses means that the take on an immense amount of risk and stress that an individual employee doesn’t. The new proposals would have the objective of taxing entrepreneurs on the same basis as employees. At a time when entrepreneurs are working hard to ensure their businesses are profitable and paying down existing debt for schooling and startup costs, their future retirement savings strategies could be in serious jeopardy. When Canada’s entrepreneurs struggle to maintain profitability and sustained growth in their businesses, the entire Canadian economy could be impacted.
Entrepreneurs risk the most
The current tax system helps supports thousands of private businesses that employ millions of people and make our Canadian economy one of the strongest of all the G8 countries. Private business owners and entrepreneurs deserve to have their income taxed at lower rates because they contribute the most to our economy and take on huge risk doing so. It isn’t “fair” to compare a private business to an individual employee and try to equate their overall returns on earned investment income. Entrepreneurs risk all of their wealth to reap the rewards, and sometimes they fail. Employees have access to pension plans and don’t risk losing all their wealth every day they go to work. A better question that we should be asking is why should those who risk the most, be at risk for losing the most?
What happens next?
The government has given taxpayers and professionals 75 days (until October 2, 2017) to provide submissions on the proposals. Given the breadth and complexity of the proposals, we hope the government considers extending the timeline for submissions.
If you would like to have your voice heard on this issue, we invite you to join the thousands of business owners who have reached out to their local MPs to raise awareness of how these proposed measures would affect your business. Find your local MP and make your views known on this important issue that would ultimately impact your bottom line.
To learn more about the draft legislative proposals, please read EY’s related Tax Alert.