Sarah Newman, Business Editor

Viewpoint: Liberals need to learn from tax backlash

By Sarah Newman

The Trudeau government is officially in damage control mode.

For the past few weeks, the federal Liberals have been facing a backlash from small business owners and economists alike for their new tax reform plan. Its crackdown on “income sprinkling” was criticized for over-complicating the tax code and penalizing stay-at-home-spouse shareholders. Its new capital gains rules angered retirees hoping to pass down the family business to their grandkids.

Most controversial, though, is the proposed heavy tax on “passive investments”, the money a small business saves in liquid investments to keep the business afloat in case of economic downturn, sickness or parental leave. The new rules would have the taxman acquiring as much as 73 per cent of a business’ leftover bank account every tax season.

That’s in contrast with the maximum 55 per cent tax that publicly traded corporations such as McDonald’s and Tim Hortons pay for the same kind of income. Admittedly, few small businesses earn enough to garner the 73 per cent tax, but the minimum is still 50 per cent — barely lower than what Canadian Tire pays.

Some business owners and economists are worried that these new tax rules could make it more difficult for mom-and-pop enterprises to compete in an economy dominated by multinational corporations. And if small businesses shut down, that wouldn’t just hurt a few people’s finances: it could absolutely gut neighbourhoods such as Centretown, which rely in large part on small family businesses for employment and economic drive, not to mention social cohesion and community “feel”.

Even here at Centretown News we depend on stories and ads from local businesses that are integral to the community. Check out this week’s articles on North & Navy (Nepean Street) and Flora Hall Brewing (Flora Street). Mainstay family enterprises such as Colonnade Pizza, now celebrating its 50th anniversary at Metcalfe and Gilmour, employ a good number local residents but enrich the lives of thousands.

Last week, in an attempt to placate the growing population of unhappy entrepreneurs, the beleaguered Finance Minister Bill Morneau and Prime Minister Justin Trudeau announced an overall small business tax cut, lowering the rate to nine per cent by 2019.

But is a 1.5-per-cent tax cut really enough to compensate for the losses the new rules could bring? A lot of business owners and experts are conflicted.

Dan Kelly, president of the Canadian Federation of Independent Business, said in a press release that the income sprinkling regulations could make it harder for wives and mothers who “participate in more informal ways in the business” to own their rightful half of the family business without arousing tax collectors’ suspicions. These “informal ways” often include tackling all the childcare and housework, so the breadwinning spouse can pull the 60-to-80-hour weeks that business ownership often requires.

Other experts say that regulating against income sprinkling is more trouble than it’s worth. According to the Canadian Centre for Policy Alternatives, only five per cent of family businesses use dividends to sprinkle incomes. It’s kind of a miniscule problem. In the government’s defence, 80 per cent of those sprinkling families net over six figures a year; they can stand to pay some tax dollars. But at the same time, six figures doesn’t go as far as it used to if you’re raising two kids in a city like Ottawa.

In the end, is it really fair that a small business could potentially have to pay 18 per cent more tax than a retail giant on their investment income? Is it wise to make life harder for small businesses, which employ just over 70 per cent of working Canadians?

I would argue it’s not — but I’m biased. My mom and dad own a small business — a blacksmith’s shop — in Hamilton, and most of my friends work at small businesses here in Ottawa.

It’s hard to feel for people who take advantage of tax loopholes like income splitting, but blacksmiths don’t exactly rake in the dough in the 21st century. And neither do most of the restaurateurs, store owners and other small business proprietors that create jobs in Centretown and enliven our streets.

In their (perhaps justified) witch hunt against millionaire incorporated professionals, the Liberal government needs to take a more targeted approach. They should be careful not to hurt the middle-class families they claim to want to help — and gut the vibrant, family-business-dominated neighbourhoods we live in.