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Open letter to Bill Morneau re: July 18, 2017 consultation paper on Tax Planning Using Private Companies
Comments on July 18, 2017 consultation paper on Tax Planning Using Private Companies
I will start by saying that I voted Liberal. I am a CPA, CA. I have a practice which deals with individuals, private corporations and their shareholders.
If these changes to the taxation of private companies are implemented as set out in your consultation paper of July 8, 2017, I will not vote Liberal next election.
I do not understand the apparent lack of understanding of the importance of private companies to employment in Canada. I do not understand why private companies would be targeted as tax evaders. I do not understand how taxing private companies punitively, helps the middle class. My clients are, or are aspiring to be, the middle class.
Mr. Morneau talks in his letter of July 18, 2017 introducing his consultation paper, about the economy adding 300,000 new jobs last year. Who added these new jobs? Where did they come from? What percentage of these new jobs came from private companies? Mr. Morneau and Mr. Trudeau should be a bit better informed than they appear to be.
Mr. Morneau’s introduction to his paper is filled with examples comparing taxes paid between employees earning a very high rate of pay and the same earnings through a private corporation. He is comparing apples and oranges.
We cannot all be non shareholder salaried employees. Some people need to set up businesses and in Canada the small businesses have the biggest impact on the economy and on job growth. In Canada about 70% of the private employment is created by small business.
These businesses owners and their remuneration cannot be compared with the remuneration of employees. Employees do not carry the risk of financial loss. In Canada 30% of the businesses started in the year are gone within three years. At the end of five years there are just over 50% of the businesses still surviving. For all those business that failed there is a huge loss to the business owner. Not only in terms of lost capital but also in terms of lost employment income with the related employment benefits for the years during which the business was opened.
Small business benefits every single Canadian. Not only does the successful small business provide income for the owner and his or her family but most often it also provides income and benefits for unrelated employees. It pays the employer portion of CPP & EI. The business if profitable, pays corporate tax, the business owner pays personal tax. The business owner, as a director, is personally responsible for personal taxes CPP & EI on employee wages even if the business fails. They are usually personally liable for money borrowed to fund the business. An employee has no such liability or financial risk.
The business owner has the financial risk of their continuing business, the personal liability for all trust monies such as taxes and GST, often the personal liability for some of the corporate debt. They have the final responsibility for everything to do with the business. There should be some potential for reward for the risk. The salaried employee does not have the same risks and responsibilities.
The business owner does not get paid holiday pay, statutory holidays, sick benefits, grief leave, extended benefits, life insurance, disability coverage and the business does not have a pension plan.
You simply cannot compare a business owner and an employee. Everyone is necessary for the financial and economic good of Canada but they are just not the same.
I do not know where the perception by Mr. Morneau has come from that private companies do not pay their “fair share” of taxes. Not only are they paying taxes with absolutely no government subsidies or no government side deals re-reduced taxes, but they are paying their employees who also pay their taxes.
The government already has a provision in the Income Tax Act dealing with reasonableness in terms of wages to family members.
Dividend sprinkling to family members is a reward for the risk. Remember only 50% of business that start in a year are still there five years later. Families risk a great deal to start their own business and to stay in it. Lots of Canadians risk and lose.
These are not tax cheats, they are not tax avoiders, and they are not the super wealthy hiding their money elsewhere and paying no tax.
Dividends paid to children between the ages of 18-23 are usually used to finance post secondary school. These children file their tax returns and pay their taxes. A family business requires the support of the whole family even when the whole family does not directly work in the business.
The private company is not allowed, by the Income Tax Act, to provide tax free scholarships for their own children.
The provisions to either implement a refundable tax that would apply to ineligible investments or to change the current refundable tax system so that the tax is not longer refundable, is completely unfair to private enterprises.
Mr. Morneau is right that there is a benefit to the private company shareholder of leaving money in the company and investing excess earnings in passive income investments, but he is very wrong in ignoring that there is also a benefit to all Canadians and to the Canadian Economy.
He fails to mention that passive income earned inside a corporation is taxed at a higher rate than passive income taxed to an individual. The government gets more tax on this income every single year it is in the corporation than if it was in the hands of the individual. Further, the tax integration system does not work perfectly so that even when the money is taken out of the corporation and taxed to the shareholder, if the shareholder’s income is at the highest tax rate personally, there will more tax paid when the money comes out than if it had been earned personally in the first place.
The system allows professional who have spent thousands and thousands of dollars and 7-10 years or more getting their formal education and then in many cases a couple of year in low paying practical experience, to have a hope of catching up or getting ahead. Catching up for what they have lost and the debt they are now carrying.
Contrary to Mr. Morneau’s comments doctors are definitely not the super rich in Canada.
The benefits of the current tax system to all Canadians are many. A big intangible benefit might be said to be the perception. The system encourages Canadian to take the risk, and the risk is high, of starting their own business, for the possibility of having a bit more control of their own financial future.
The other more tangible benefits of the current system include the strengthening of the small business in terms of being able to survive tough times. All businesses have cycles and most need a significant financial back up in case of hard times. All healthy businesses need a big reserve of capital just in case. Just in case might be having the asset backing to risk hiring more employees, exploring more business options, or being able to borrow when borrowings are required.
There is also benefit to the shareholders in the saving for their retirement outside of an RRSP or a pension plan. The government benefits when it citizens are able to care for themselves in their retirement by not having to fund anything for them.
Small business owners do not deserve to be penalized for their effort and their risk. None of them were given what they have. They have worked long hours, sometimes hard hours, sometimes at great financial risk and often, in the beginning, at very low rates of pay per hour or no pay to get their companies established and to keep them going.
Some have spent a lot of years and a lot of money in schooling to get where they are. If they a had worked instead of going to school then they may well have been far better off by their late 40’s but hopefully we as a society are better off for their years of education.
This proposal is punitive and negative and disheartening.
Converting income to capital gains:
I have no issue with making the changes to the Income Tax act to eliminate this possibility.
Lola Marie Vermeulen, CPA, CA, T.E.P.
The L.M. Vermeulen Group Inc.