The Kelowna Chamber is raising a red flag following the recent release of a federal government consultation paper that proposes significant tax policy changes.
"We believe in the principle of having a fair tax system, but are concerned some of the proposed changes could have a negative impact on entrepreneurs and family owned small businesses," says Tom Dyas, Kelowna Chamber President. "We are reaching out to our local MPs to raise this issue with them."
The Federal Finance Minister Bill Morneau released a consultation paper that outlines the proposed changes and it initiated a 75-day consultation process during which it will accept submissions on these proposals. The Kelowna Chamber, along with the Canadian Chamber and other chambers across Canada, are expressing concern over the proposed changes which could have a significantly negative impact on small businesses.
"We hope the federal government will listen to the concerns being expressed and re-examine the proposed changes," says Dyas, who added, "For the general public this may 'sell' well as it will be framed as going after 'those rich people', but to the small business owners who are the backbone of the Canadian economy and have risked quite a bit to start up and run their businesses, this could punish them and become a disincentive for others to take risks in running their own businesses."
The Kelowna Chamber has expressed its concerns to MP for Kelowna-Lake Country Stephen Fuhr, and are pleased that at least he is listening to those concerns. Further discussion with the local MP is expected as the Chamber looks to raise the issues over the proposed tax reforms.
The Chamber understands and supports the federal government's desire to ensure tax fairness for Canada's middle class, but wants to ensure the impact of any proposed changes are fully understood prior to implementation so as to avoid unintended consequences that could negatively impact the economy. The current proposed changes do not result in this desired tax fairness.
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Tom Dyas, President Dan Rogers, Executive Director
Kelowna Chamber of Commerce Kelowna Chamber of Commerce
The Department of Finance Canada is considering major changes to how corporations are taxed. The proposed rules could have a significant impact on many Canadian businesses: potentially raising taxes, increasing the administrative burden on SMEs and heightening the impact on family-run businesses.
On July 18, Finance Canada launched a consultation on how "tax-planning strategies involving corporations are being used to gain unfair tax advantages." The document contains proposed policies to close these "loopholes." There are four key changes that will affect business:
1. Sprinkling income using private corporations: The government wants to tighten rules to prevent a business owner from unfairly transferring income to family members who are subject to lower personal tax rates. In certain circumstances, owners would have to demonstrate that wages and dividend payments are "reasonable."
2. Multiplying the Capital Gains Exemption: When an individual sells a small business, the first $850,000 of capital gain is exempt from taxes. The government wants to prevent tax planning structures that enable multiple family members to use their exemptions.
3. Reducing the tax deferral advantage on portfolio investment inside a corporation: Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates (which are generally much lower than personal rates). The owner defers paying personal income or dividend taxes until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
4. Converting a private corporation's regular income into capital gains: Income is normally paid out of a private corporation in the form of salary or dividends that are taxed at the owner's personal income tax rate. In contrast, when a business is sold, it is taxed as a capital gain, where only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains. The government wants to tighten the rules to prevent certain tax planning structures, but it is open to more favourable treatment for genuine family business transfers.
The Canadian Chamber of Commerce and its Taxation Committee are currently studying how the proposed changes will affect members in different industries, in family businesses and those with different ownership structures. They are submitting recommendations to Finance Canada.
In particular, the Canadian Chamber is looking for detailed examples and cases of how a specific small business will be affected by the changes.
To view the consultation documents released by Finance Canada: