Mark Gerretsen

Your member of parliament for


Kingston and the Islands

Mark Gerretsen

Your member of parliament for


Kingston and the Islands

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Feedback for Minister Morneau on Proposed Tax Changes

Kingston and the Islands Town Hall on Proposed Tax Changes

September 29 6pm

A town hall was held on Friday, September 29 in order to bring forward to the Minister of Finance, Mr. Bill Morneau, and the federal government, local concerns about the proposed tax changes. These proposals were brought forth on July 18 for a 75 day public consultation period. The town hall, organized by Ms. Deb Lefebvre, had an attendance of over 130 constituents, including small business owners, physicians, and other medical practitioners.

Kingston Advocacy for Small Business (KASB), a group of over 50 local accountants, lawyers, and interested stakeholders, prepared a brief report on the main issues that the proposed tax changes address.

Specifically, they categorize the proposed tax changes into four main sections:

  • Tax on split income (TOSI)—draft legislation
  • Converting dividends into capital gains (i.e. Family Succession of Businesses/Farms)—draft legislation
  • Increase taxation of passive income inside a private company—discussion paper
  • Capital dividend account and rules affecting trusts

KASB shared a handout of the above information with town hall attendees, as part of their mandate to “educate and inform our community and in particular small business owners about the possible impact [of the proposed tax reforms] on small businesses.” KASB noted in their handout that:

We think the government should slow down this process and we encourage a comprehensive review of our tax systems. We think some of the policy objectives have merit, but the proposed tax reforms will have many unintended consequences that will negatively impact small businesses and therefore, our communities. This does not mean we are saying there will be harm in all situations, but in enough situations such that the proposed tax reforms should not be passed until there is significant consultation.

 

This concern was shared with nearly all of the town hall participants who shared their feedback.

The speaker’s panel at the town hall consisted of:

Deb Lefebvre, town hall organizer and a constituent in the health care sector

Mark Gerretsen, Member of Parliament

Jason Skilnick, Partner at Collins Blay LLP (speaking on behalf of KASB)

Jonathan Warren, Tax Partner at KPMG Enterprise (speaking on behalf of KASB)

Bill Stewart, Advocacy and Policy Specialist for Greater Kingston Chamber of Commerce

Twenty-eight attendees shared their feedback, many of whom spoke more than once. Speakers ranged from independent IT consultants to recent college graduates and specialist physicians. Nearly all of the speakers owned an incorporated business. Many highlighted more than one theme in their comments.

Concerns primarily fell into the following broad categories:

  • The definition of “fairness” and whom the proposals target

Eight constituents spoke to this theme. Despite the general perception that physicians are being targeted by the “fairness” of the proposed tax reforms, even small business owners questioned “Why is one sector being targeted if it is about fairness?” Another speaker stated that he felt the “proposals were architected to go after anyone earning an income from their corporation.” The constituents all want to know what is the government’s definition of fairness?

  • Family Succession

Four speakers brought up this subject, in light of the tax proposal that the taxes will be higher for the transition of businesses and farms to family members than a third party. One business owner asked the government “is it fair or appropriate that it is better for a business owner on retirement to sell his business to a third party stranger instead of a family member?” All of the speakers indicated that they hoped to pass their businesses on to their children rather than a third party, but the proposed tax change would make it financially difficult.

  • The Perceived Attack on Passive Income

Five speakers addressed their concerns about the perceived attack on passive income. A physician cited a personal anecdote about his accountant telling him that, in light of the proposed tax changes, he should stop working as hard because without passive investments, there is less incentive for him to work harder to care for his patients.

  • Pensions/Retirement Planning

This was the topic most discussed by constituents—nine different speakers mentioned this theme. One explained that a public service pension was far more valuable than anything he, as a small business owner, could save with an RRSP. Another constituent stated that he paid for the start-up costs of his small business with his RRSP savings. A physician mentioned that a doctor, for example, who typically begins working full time only in their 30s, will never be able to catch up saving for retirement with only RRSPs in comparison to, for example, a public-sector pension. All of the constituents expressed concerns with their ability to save for retirement if the proposed tax changes come into effect.

  • Next generation of small business owners being negatively affected

Several younger constituents, in particular, raised their concerns about how the proposed tax changes will affect the next generation of small business owners. One young speaker explained that many small business owners of the so-called baby boomer generation are trying to wind up their businesses and retire, and if the proposed tax changes come into effect, it will put many young employees out of a job.

  • “Reasonability” Test

Two speakers discussed the reasonability test proposed by the government, and how that will be defined. One of the speakers noted that the public will require some “good guidance” as to what will be considered reasonable by the government, i.e. in terms of income sprinkling.

Several constituents recommended that the government scrap all of the proposals.

Specific suggestions included the following:

One constituent, a financial advisor, proposed that perhaps the government should consider only targeting those small businesses with revenue of $5 million and up.

Two constituents recommended that there be a one-time option to move saved money out of the corporation and into TFSA’s, RRSPs and other savings instruments in order to accommodate for the fact that many people have saved within the corporations for retirement using existing mechanisms that allow for this.

Appendix

Further Feedback from Constituents of Kingston and the Islands on the Proposed Tax Reforms

Six constituents provided further feedback on the proposed tax reforms after the town hall on September 29. All of the constituents expressed similar concerns to those six main themes mentioned in the report.

One constituent, a small business owner, focused on fairness, and stated that, “The government has portrayed small businesses as tax cheats. I assure that we are paying taxes on our income.  I would suggest that the government look at businesses that have off shore accounts and businesses that are getting huge amount of funds from the government and then paying their CEO millions of dollars to retain them in the business. Do you feel that this is fair?”

Similarly, another constituent had concerns about tax fairness. The constituent asked “if there is tax reform why focus only on small businesses?  Why not focus on large corporations and others?” The constituent also wrote about the potential negative impact on savings and planning for retirement if the proposed tax reforms take place.

Two additional constituents who offered feedback through email were physicians. One addressed the negative impact on young physicians and their difficulty in saving for retirement through traditional mechanisms. The second had similar concerns, and noted that, “For these young physicians the cost of incorporating makes no sense, but it is something many will take advantage of as their debt is paid down. Incorporating is a perk that affords them some relief from the lost years of income and the fact they can not start saving for their children’s education and their own retirement until much later in life.”

This same constituent echoed the theme of fairness that was raised in the town hall. He wrote that, “In an attempt to create fairness, lets[sic] not create new inequities. Lets not kill the spirit of entrepreneurs and lets start to repair the damage done through comments made by our Minister of Finance and our Prime Minister.” He acknowledged that tax reform is important and necessary, “but a process that picks on a single group, a group that is so vital to our economy, employment and health care delivery, is definitely not the way to go about this. It is divisive and is simply not addressing the issue of equity.”

Finally, two constituents, both of whom work in the financial sector, sent feedback. The first constituent supports the proposed tax reforms; however, he feels that the provisions that Minister Morneau proposes will result in a two-tiered tax system “that is actually regressive, imposing higher effective rates on lower income individuals than on their higher-income and more fortunate counterparts able to operate within a CCPC.” The other constituent brought up the subject of retirement planning and saving through income splitting, without which some small business owners may be “unable to retire (unless they can sell the business…to a non-family member, which is a huge uncertainty).

The constituent provided concrete suggestions for several proposed tax reforms:

  • A proposed timeline to phase out income sharing:

Phase out income sharing over a minimum of 10 years.

2018 income can be allocated 50/50

2019 income can be allocated 55/45

2020 income can be allocated 60/40

2021 income can be allocated 65/45

And so on, to

2027 income can be allocated 95/5

2028 no sharing

Though the constituent notes that completely phasing out income sharing is “unfair and will stunt business and economic growth.”

  • Another option for income splitting would be “the ability to share income up to $230,000 and above that, must be allocated to the business owner (this will catch the 1% that continues to be referred to and avoid penalizing the rest).”
  • Regarding the the sharing of income with adult children for the purposes of funding education, the government should “allow the sharing of income up to a certain dollar value (maybe $30,000) to cover the cost of post-secondary education, but not more unreasonable amounts.”
  • Or if it must be phased out, the government should provide a schedule, perhaps something like:

Starting in 2018, a 6 year allocation of $30,000 to adult children (this will catch the group closest to having to fund education immediately).

2024-2029, allowing allocation of $20,000 to adult children (there will be 6 years for the business owner to save the additional needed, now knowing the income sharing rules).

2030-2035, the next 6 years, allowing allocation of $10,000 to adult children (again, this will give 12 years for this group to prepare).

At the end of this time frame, these punitive tax changes will no longer affect children already born.