When federal Finance Minister Bill Morneau proposed changes to tax planning policies back in mid-July, the first feedback that we heard was from accountants. Amongst many other concerns, they were telling us that even if those changes were implemented at that time, it would be difficult to get their clients ready by the January 1, 2018 deadline. Perhaps a surprise to Minister Morneau, changes to the 3,300+ word tax code takes some time to consider and apply to each business.
When the proposals were first released we asked questions like: 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?
Then we were reduced to asking for months: so what are the changes, exactly?
Now, barely two weeks away from the government imposing the most disruptive tax changes in 40 years on Canadian businesses, the minister has provided some details on the final day of sitting for parliament in 2017 - providing a clear signal that the federal government does not want to answer for these changes anytime soon. The original proposals themselves are harmful to Canadian business, but the cavalier timing from July 18 until now is truly disheartening for business and the tweaks put forward by the government in November and this week have done precious little to alleviate these concerns.
Mr Morneau should heed the advice from the Senate’s Standing Committee on National Finance in their report released on December 13, 2017. That group - made up of Conservatives, Liberals and Independents overwhelmingly agreed with small business that the proposals should be scrapped altogether. They also recommend a full review of Canada’s tax system, which business has been suggesting for years. At a bare minimum it is irresponsible for the government to introduce these changes without a completed economic impact analysis.
And the problems aren’t just limited to bad policy - process is as much of a concern. We recently learned from Auditor General Michael Ferguson that CRA is currently only able to field one-third of calls coming in from Canadians and are giving incorrect advice 30% of the time - this is beyond alarming already. Now the government is proposing to increase the workload of CRA employees by making the tax code even more complicated and adding the responsibility of deciding what’s reasonable compensation for the spouse or child of a business owner. Oh, and did I mention that both Chief Justice Rossiter and former chief justice Rip of the Tax Court of Canada have said that the “reasonableness test” required for income splitting could lead to a higher volume of appeals from taxpayers, further clogging up the court system?
The government has tried several times to refine their proposals and their messaging, for example, the $50,000 cap on passive income earned. The government keeps saying that this threshold will only
affect 3% of corporations. It is true that most small businesses won’t reach that figure, but the idea that small business would be happy that reforms would only affect the top 3% of corporations is wrong headed. Small business relies on larger businesses as their customers through their supply chains and recognize the importance of large businesses as an economic driver. It matters if a company has 500 employees or 550; it matters if a large companies expands by 5%. That all adds up. It’s how economies function and grow.
The economy works best when all sectors and strata of the business community are firing on all cylinders. The relationship between different industries and size of business is symbiotic and integrated. In Fredericton, we are known as the Startup Capital of Canada and many of these startups rely on mature businesses for their seed funding and as early adopters of innovative technologies. Do we want to stifle this germination of the ecosystem?
People, capital and many business operations are all highly mobile today. Our region is already struggling with that very issue as we feel the pull to other parts of the country that otherwise have a better economy and more opportunities for people and businesses - these proposed reforms are likely to exacerbate and accelerate the problem as we are less able to absorb yet another hit to our businesses. The Atlantic Region and Canada as a whole are facing difficult and complex global issues, the last thing we need is to create more challenges for ourselves and reasons for business investment to leave.
It is evident from the ever-increasing complexity of the tax code that tax policy has become a political tool and it really shouldn’t be. The Senate report shows what vastly different conclusions are reached when partisan politics is removed. If the government’s concern is really fairness, then let’s have a full conversation and review through that lens. There is no chance that more tinkering and cherry-picking certain parts of tax policy will lead to the road to fairness - there are just too many moving parts to be able to do this on a piecemeal basis. So let’s hit the pause button on the proposals, engage in a full review through a Royal Commission and ensure that any new proposals should be straight-forward, simple and efficiently implemented by CRA and easily administered by small business. Oh and do try to let business know what the rules are before we’re supposed to comply with them.
Krista Ross is CEO of the Fredericton Chamber of Commerce, a nationally accredited organization with nearly 1,000 members, is an active business organization engaged in policy development and advocacy that affects the competitiveness of our members and the Canadian business environment. The Chamber’s vision is "Community Prosperity Through Business".
