On 18 July 2017, the federal Finance Department released a discussion document that proposed a tectonic shift in how small businesses would be taxed. A tax policy review was not a surprise - this government did indicate in their platform that they would like to take a look at how tax is administered in Canada - great idea, the business community has been asking for a review of the tax system for many years.
What we were not expecting was completed ‘draft’ legislation and a scant 75-day consultation period, which began in the dead of summer - hardly the best time to genuinely engage stakeholders. To be sure that the message was crystal clear, Finance Minister Morneau has stated that “we will not change our minds,” in reference to the proposals. Our members agree with the minister that this is a consultation in name only. For some perspective, the last time changes this fundamental were made to our tax legislation, a Royal Commission was appointed in 1962, which produced a six-volume report in 1966. Changes were implemented in 1972 - 10 years after the government first began the process.
The government’s discussion document and Minister Morneau keep coming back to the mantra of “fairness”. And of course we all agree that tax policy should be fair. However, it is clear from the minister’s statements and actions that fairness - even beyond the negligible consultation period - is not the government’s objective at all. That word and all it represents is rather being used as a wedge between business owners and their employees. The minister says he wants to close “loopholes,” but when you look a little closer it is obvious that he is actually referring to the very structure of our corporate tax system that was produced by a thoughtful, 10-year review and robust consultation in the 60s and 70s. And what was the fundamental principle that the Royal Commission and legislators of the day used to create that very system? You guessed it - fairness.
Our members believe the language chosen in the discussion document portrays the government’s true valuation of the contributions of small business. Our members take offense to the tone of the document, implying that entrepreneurs avoid paying their “fair share” of tax due to taking advantage of loopholes. To suggest that the users of the system are avoiding paying their fair share is, at best, disingenuous - politics at its worst.
The federal government asserts that they value the contribution that small businesses and entrepreneurs make to the Canadian economy. However, this appears to be quite literally untrue given the lack of credit attributed to the risk entrepreneurs assume when starting a business as well as the financial disadvantages of owning a business. These include employer-contributed pension plan, Canada Pension Plan benefits, employer-contributed health or dental benefits, maternity leave, vacation pay, sick time, and the Employment Insurance safety net.
Perhaps even more telling is the information not included in the document. Has an economic impact study been conducted on the proposed changes? Has government evaluated the increased compliance burden and financial cost to small businesses? Has government evaluated the increased cost and administration for CRA? How will the proposed changes be managed? Some of the language is vague and subject to interpretation. For example, implementing a “reasonableness” test. Has the benefit to the Canadian taxpayer been evaluated against the potential job loss and business failures this will result in once these measures are implemented?
When businesses lose, so does the middle class. Business owners that are affected by these changes will, quite logically, take steps to protect their livelihood, their retirement, their rainy day fund. This will mean fewer jobs, fewer hours for employees, less disposable income for charities and community organizations - putting further pressure on the country’s social safety nets. Small business owners are the engines of our communities - these proposed changes will hurt their ability to contribute and disincentivize the next generation of entrepreneurs - not a “fair” outcome for anyone.
Is the system as it is currently designed perfect? Unlikely. Are there provisions in the current set of tax structures that could be improved upon? Probably. Should we continue to encourage those willing to take risks to create jobs in our economy? Absolutely! We need to be careful that in the politically popular hunt to stamp out the advantages of the “wealthy” we don’t irreparably harm the imperfect but relatively competitive system we currently have. If the purpose of these changes are to provide “fairness” to the middle class, don’t forget that the vast majority of small business owners fall into this category.
Krista Ross is CEO of the Fredericton Chamber of Commerce. With more than 950 members, the Fredericton Chamber of Commerce is one of Atlantic Canada’s largest chambers of commerce. A dynamic business organization, the Fredericton Chamber of Commerce is actively engaged in policy development that affects the competitiveness of our members and of the Canadian business environment. It’s vision is Community Prosperity Through Business.