Thirty-five Canadian business organizations have written to Finance Minister Bill Morneau to ask that he scrap proposals to crack down on the use of tax planning strategies by private corporations.
The business groups have together formed the Coalition for Small Business Tax Fairness to opposing the Government’s proposals. Signatories of the letter include the Canadian Chamber of Commerce, the Canadian Taxpayers Federation, the Retail Council of Canada, Restaurants Canada, the Canadian Dental Association, the Canadian Medical Association, and the Canadian Association of Farm Advisors.
According to the letter, the Government’s reforms “are not minor amendments, but are sweeping changes that will affect all sectors of Canada’s business community.”
Dan Kelly, President of the Canadian Federation of Independent Business, said: “These proposals, while intended to target the wealthy, will hurt middle-class business owners from every sector of the economy. These are shop owners, farmers, doctors, financial planners, homebuilders, and trades in all sectors – the entrepreneurial families who are the backbone of the economy and responsible for the majority of the job creation in Canada.”
“Our coming together highlights the urgency of combatting these proposals which, if legislated, would signify the biggest changes to the business tax system in decades.”
In July, the Government launched a consultation on how best to crack down on three tax planning practices it believes are being used to gain unfair tax advantages. The consultation is open until October 2.
The Government wants to tackle so-called income sprinkling, whereby income is diverted from a high-income individual to family members with lower personal tax rates, or to family members who may not be taxable at all. It also wants to ensure that the tax treatment of passive investments retained in a corporation is fair and to prevent the surplus income of a private corporation from being converted to a lower-taxed capital gain and stripped from the corporation.
The letter explained that members of the signatory organizations “feel unfairly targeted, intentionally or not, by the changes and painted as ‘tax cheats’ by the Federal Government simply for accessing tax planning tools that they have been encouraged to use for decades.” It warned that the changes will make the Income Tax Act still more difficult to interpret and will increase business uncertainty for independent business owners.
Turning to the specific proposals, the letter argued that the proposed reform of income sprinkling rules demonstrates “a lack of understanding on the part of the Government on how independent business truly functions.” It stated that it is inappropriate to compare an entrepreneur with a salaried employee and stressed that many business owners do not have access to safeguards such as employment insurance for job security.
The letter added that passive investments in corporations “serve as insurance against emergencies and unforeseen costs,” and the changes are likely to make firms more vulnerable in difficult economic times. It explained that passive investments help businesses to save for major investments, expansion, and innovation and that the reforms would reduce the ability of business owners to invest in their business.
The proposed amendments to the capital gains tax rules would, according to the letter, serve “almost as a form of retroactive taxation,” as they could affect business value appreciation from the past. The changes could also “result in the double taxation of some estates, and could make it more difficult for business owners looking to do intergenerational business transfers.”
The letter concluded by urging Morneau to take the proposals off the table. It asked Morneau to engage in meaningful consultations with the business community to address any shortcomings in tax policy.
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