The federal government's recent proposed tax changes affecting private corporations will lead to uncertainty and a variety of unintended negative consequences for Canadian small businesses, according to the Canadian chapter of the Society of Trust and Estate Practitioners (a.k.a. STEP Canada).
"The more you get into [these proposed rules], the more you analyze them, the more you look at them, the more problematic they are," says Michael Cadesky, co-chairman of STEP Canada's public policy committee and managing partner with Cadesky Tax in Toronto.
STEP Canada held a special symposium in Toronto on Thursday bringing together more than 70 individuals from a wide variety of industries to discuss the implications of the proposed rules. Participating in the symposium were the Financial Advisors Association of Canada (a.k.a. Advocis), the Conference for Advanced Life Underwriting, the Canadian Life and Health Insurance Association Inc., the Canadian Bar Association, the Canadian Professional Accountants of Canada, as well as groups representing small businesses, education, real estate, economics and agriculture.
The federal Department of Finance Canada released a consultation paper in July on the use of certain tax-planning strategies involving private corporations that the government argued gave wealthy Canadians access to unfair tax advantages. The deadline for submissions of comments to the paper is Oct. 2.
STEP Canada indicated in a release issued the day following the symposium that several of the participating groups, including STEP Canada itself, intend to make submissions to the government about the proposed changes. Cadesky anticipates that STEP Canada will file its submission by mid-September.
"We will strongly advocate for a deferral of these [proposed] rules, and further study, and a more extensive consultation process," says Cadesky. Part of the issue, he adds, has been the relatively short period of time — "75 days in the middle of summer" — that the government has given stakeholders to review the extensive consultation paper.
"If the entire area of the taxation of private companies is to be reformed, let's do it comprehensively, let's do it properly," Cadesky says. "STEP Canada will be very pleased to be engaged in something like that."
The tax strategies the government highlighted in its consultation paper are:
> "Income sprinkling" involving the diversion of income from a high-earning individual to a family member in a lower tax bracket.
> The retention of passive investments in personal corporations to take advantage of the difference between corporate and personal tax rates.
> The conversion of a private corporation's regular income into capital gains in a way that the government believes is unfair.
The proposed rules are highly complex, Cadesky says, and will represent an increased compliance burden on small business people, many of whom, he argues, would qualify more as middle class as opposed to wealthy.
"The small business area takes an awful lot of the brunt of this [tax compliance] complexity," he says, "and is probably the least equipped to deal with it appropriately because it doesn't have the resources and can't afford to deal with the issues that are there."
The rules, if enacted as proposed, would lead to several troubling, if unintended, consequences, Cadesky says. One example would be that business owners, under certain circumstances possible under the proposed rules might face a greater tax liability if they transfer the business to a family member as opposed to selling to a third party.
"I can't believe any [government] would adopt a policy that says, ‘We're going to penalize you on a transfer to your children,' whereas if you sell it to an arm's-length person, you can have an advantage. That's nuts," Cadesky says. "That's the undoing of Canadian private business, because [business owners] are going to sell to private equity funds, they're going to sell to U.S. public companies, it's everything we don't want to see happen. I don't think these rules were thought through from that perspective."
Another issue would be the so-called "reasonableness test" introduced in the proposed rules that would be applied to adult family members who receive certain payments from a private corporation, Cadesky says. The tax treatment of those payments would be determined by looking at the contribution of a family member, whether in labour or capital, to a business.
"I've heard of reasonable compensation for salary, but I've never heard of reasonable compensation for dividend and capital gains anywhere in the world," Cadesky says. "Maybe there's a country somewhere in the world that uses it, but it's a foreign concept to me."
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