How many people will be affected by proposed changes to Canada’s small business tax reforms? Well, that depends on whom you ask.
Speaking to the Western News from Portugal, Penticton-area accountant Curtis Hamilton, the one-man show behind Tax Guise Accounting Ltd., said 10 per cent of his corporate clients — “not a huge amount” — would be affected by the changes.
On another extreme, the Canadian Federation of Independent Business claims about 95 per cent of its membership would be affected by the changes.
“The government is trying to convince the public that these proposed changes are meant to support the middle class — that they are only targeting high-income business owners. The reality, however, is these are broad-brush proposals that are going to affect businesses at every income level across the country,” CFIB president Dan Kelly said in a press release.
If the discrepancy between CFIB and Hamilton isn’t confusing enough, a survey released this week from the Angus Reid Institute shows a number wildly different from each of those, still.
According to that poll, 42 per cent of owners would be negatively impacted by changes to passive investment taxation, compared with 43 per cent claiming no effect and five per cent claiming a positive effect.
Passive investment refers to the holding of excess profits in accounts held by the corporation, such as a mutual fund, where it can gain more money with a smaller tax of 13 per cent (the small business rate).
The federal government expects that money to be later invested in growing the business, but says business owners take advantage of that loophole by paying themselves with the extra money made — giving small business owners an advantage over unincorporated businesses or individuals.
Twenty-four per cent of the Angus Reid respondents said changes to income sprinkling tax laws would not affect their business.
It’s unclear what level of overlap there is between those who use the passive investment and income sprinkling tax advantages. But if one accepts, hypothetically, that each business only uses one or the other tax advantage, both added up make just 66 per cent — well under 95 per cent and a far cry from 10 per cent.
Income sprinkling has perhaps been the most contentious of the three major changes proposed by the federal government. Opponents, including the federal government, say the practice unfairly allows small business owners to dodge higher tax brackets by paying out family members with dividends of the company’s profits, whether or not they contribute to the business.
“They should be able to distribute the tax earnings in any way they see fit,” Hamilton said. “It’s not a tax loophole, it’s a strategy that was designed for them specifically, and now they want to take it away.”
Hamilton says the tax advantage is intended to be dividends for people who put “blood, sweat and soil” into the business, but the federal government says people are taking advantage of it by paying out family members who haven’t contributed capital to the business.
That, the government says, is an unfair advantage over people who haven’t or can’t incorporate.
“If they contribute to the business, and they are shareholders and they actually did work and they get paid in dividends instead of T4 income, that should be allowed,” Hamilton said. “They’re taking away a strategy for paying employees. Maybe they do work for the company. Maybe they don’t, maybe they do.”
But Hamilton said just a small percentage of companies use the income sprinkling beyond its intended uses, adding the tax changes will be just a small dent for bigger corporations.
“It’s basically detrimental to the middle class corporations,” he said. “It doesn’t really affect the high-income earning corporations at all. They make so much money, it’s not really providing a huge benefit for them. In fact, they couldn’t care less.”
Hamilton said he has put out his own input to the federal government through the Canadian Taxpayer’s Federation, saying he believes the changes won’t come to fruition.
“It hasn’t been carved in stone yet, and the government’s gotten a lot of bad feedback on what they’re trying to do.”