It has been more than a year since something big happened to small business in Canada. After decades of governments of all stripes declaring their admiration and support for the nation's entrepreneurs, our federal government took a very different tone.
Suddenly, the message from Ottawa was that many small business owners were not paying their "fair share" and they were exploiting "loopholes" in our taxation system. They painted an image of a bunch of wealthy fat cats, setting up corporations with the primary aim of skirting their tax obligations.
The rules are designed to help businesses grow - not shelter personal income from tax. Canadians deserve #TaxFairness. 1/— Bill Morneau (@Bill_Morneau) August 28, 2017
The issue boiled over during the summer of 2017, with an unprecedented response from the millions of Canadians who are self-employed or who risk their own capital every day to employ others.
Last summer and fall, the proposed changes to small business tax policy dominated the headlines from coast to coast. Business owners — on their own and through their associations like the Canadian Federation of Independent Business (CFIB) — started to fight back. In fact, 80 organizations joined to battle Ottawa's unfair new tax rules.
The message from government appeared designed to pit small business owners' employees against them, when the reality is employers don't deserve their workers' animosity. Small business owners shoulder all the risk involved in starting a business. Standard working hours and mandatory paid vacation are not part of their reality. They pay themselves last, after their employees, suppliers and governments, and their paycheques can sometimes work out to less than minimum wage when their working hours are accounted for.
Starting last October, the government seemed to soften its language and some of its policy proposals. Small firms were relieved when government backed off a proposal to change capital gains tax rules. It reinstated a previously abandoned election commitment to reduce the small business tax rate to nine per cent.
Sadly, changes to tax policy for family businesses largely went ahead in January, with only minor concessions and a touch of additional clarity. The negative effects of this policy change will likely not be felt until audits of the 2018 tax year begin and the Canada Revenue Agency tries to interpret the mess of new rules.
A new approach to taxing passive investment income revealed in the 2018 budget, while addressing some of the worst red-tape headaches, has created an entirely new set of tax losers. CFIB has heard from many small business owners who will be taxed at the same rate as large corporations due to past decisions to sock away some money for tough times in passive investments, an increase that could mean a tax bill up to 67 per cent higher than in previous years. This new approach abandoned the government's promise that none of the changes would have a retroactive impact on business owners.
Even I was shocked to see how deeply this issue has affected them.
By far the most lasting impact of the 2017 federal small business tax fight is the anger and disappointment it has left among Canada's independent business community. More than a year later, it really hasn't gone away.
Despite the hundreds of business owners with whom I've spoken and the thousands of direct comments I've read from entrepreneurs from across Canada, even I was shocked to see how deeply this issue has affected them. When asked if the planned tax changes have caused owners to rethink whether they wish to continue to be in business in Canada, an incredible majority strongly (35.9 per cent) or somewhat (28.1 per cent) agreed.
Does this mean that nearly two-thirds of Canada's small business owners are planning to close up? No.
But what it does say is that many business owners have seriously reflected on why they are in business in the first place, and whether their governments actually care about them and the sacrifices they make to grow the economy, create jobs and contribute to their local communities.
It's not just these tax changes or the federal government that have contributed to this growing sense of alienation. Many small firms are facing five years of new carbon taxes, seven years of Canada Pension Plan premiums hikes, and massive changes to minimum wages and labour laws in several provinces.
And despite the gong show south of the border, small business owners are keenly aware that the tax and regulatory environment in the U.S. is going in the opposite direction.
Do I think the damage is irreparable? No. But there is a lot of work to do. CFIB is calling on all parties — including the government — to commit to some important fixes. We need government to delay the implementation of the new income splitting rules to 2019 and provide a full exemption for spouses who play a critical role in a small business, even if an informal one. We ask government to ensure past passive investments do not mean that a small business gets taxed as a large corporation.
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And we ask government to dust off the one part of the 2017 proposals that small business owners did like — the ability to sell a business to a family member without paying more taxes than one would if selling to a stranger. In fact, borrowing the Obama/Trump approach of allowing small businesses to immediately deduct important capital expenses would go a long way in narrowing the Canada/U.S. tax gap.
It isn't impossible to soften the anger and discord among Canada's entrepreneurs. But it sure is going to take a lot more than a soothing news release during October's Small Business Week.
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