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The Winds of Change or the Winds of War? Government’s Tax Proposals Target Business Owners

As we return from Labour Day weekend and reflect back on the summer that never quite was, a major issue that will grab attention over the next weeks, now that it’s business as usual again, is the government’s recent tax proposals.

The government chose on July 17, 2017 in the midst of the summer doldrums to launch its strategic ballistic missile of tax proposals and draft legislation on the taxation of private corporations and their shareholders. We were forewarned in the February 2017 Budget to take cover as the government pronounced that it intended to target private corporations and their shareholders who it says unfairly use tax planning to lower their tax bill.

And with that, we now have proposals which contain what could be the most significant changes to tax policy in over forty years and which have rocked the tax planning community, as it digests and come to grips with the potential impact of these measures and, with other stakeholders, prepare to offer their rejoinder in a too-short consultation process (only 75 days) which ends on October 2, 2017. No doubt, there will be a flurry of activity this month and increased media attention. The Society of Trust and Estate Practitioners (“STEP”) quickly convened a one-day symposium on August 17, 2017 to discuss and form conclusions on the proposals, and the Canadian Tax Foundation is slated to do so on September 25, 2017.

The consultation paper “Tax Planning Using Private Corporations” and draft legislation focus on three main issues that the government says can result in “high income individuals gaining tax advantages that are not available to most Canadians”: sprinkling income using private corporations to lower tax-rate family members; holding passive investments inside a private corporation to gain the advantage of lower rates than personal rates facilitating the accumulation of earnings; and converting a private corporation’s regular income into capital gains to take advantage of the lower rate on capital gains.

As they say, it is not what you do but how you do it that is important. The emerging consensus is that these measures have broad and negative impact on business owners, including small business owners who employ most Canadians, generate most of the new jobs, and who have organized their affairs over the last several decades based and relying on existing tax policy and accepted tax planning in order to have a sustainable business.

What is missing to date are objective, comprehensive impact studies of who will be affected, and how, if these proposals are carried through not only at the micro level of the individual business owner, but at the macro level of the Canadian economy as a whole.

No doubt there are a number of serious fundamental questions that need to be posed, reflected on, debated and responded to with regard to existing tax rules and planning, and whether they appropriately achieve their objectives to ensure our taxation system works well, and that developed and thoughtful tax policy underpins it. However, measures that undermine Canadian entrepreneurialism and small business owners just when it seems the Canadian economy is starting to get on a roll again and which could kill the proverbial golden goose that lays the egg, would be ill-conceived.

On July 1, 2017, Canadians celebrated with pride and satisfaction our 150th birthday, and generally relative to many other countries, our national motto of “peace, order and good government” has been lived up to. Let us hope that as tax changes are enacted, in whatever final form, our national motto will infuse the discussion and the debate, and that we do our best to continue to live up to it.

-Margaret O’Sullivan

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances