When the Government Changes the Rules of the Game
Updated: May 19
Recent proposed tax reform for private corporations has brought to light the continuing trend of the current Canadian Federal government to significantly increase the tax burden on the approximately 1,200,000 family businesses and professionals across Canada. The recent proposed legislative changes include measures to revamp tax policies that have been in place since the early 1970s with a consultation period held over 2 months during the summer. Some of the initial proposals are targeted to reduce the ability to income split within families who own a business, restrict or eliminate the lifetime capital gains exemption, restrict earning passive income through a corporation, as well as many others. We believe these proposed changes would not only pose significant negative financial impacts to these families, but also to employees and communities these people live in. In essence, radical changes to our current tax legislation have the potential to hurt all aspects of our economy.
While many Canadians believe they pay their “fair share”, the top 10% of income earners pay 54% of all federal and provincial taxes, while also making significant contributions to local charities such as hospitals. Of these taxpayers, many are small family businesses who create as much as 70% of all new jobs in Canada. While it may seem to some that most wealthy individuals are motivated to pay as little income tax as possible and to take every advantage of an opportunity to do so, they may not understand that the after-tax savings from individuals and businesses is what is called ‘private capital’.
Private capital is the lifeblood of the economy that is used to invest in business, fund retirement, or spend in the economy. Without private capital, many of the benefits we take for granted in today’s civilized society may be reduced or eliminated.
The accumulation of private capital is already under strain in Canada, as taxpayers have already experienced a reduction of 50%in the annual TSFA contribution limits and a significant increase of the top tax rate to 54%.To add the icing on the cake, we should mention the minimum wage increases to $15/hr and our electricity prices in Ontario!
To combat Canada’s highly progressive tax system, many tax and legal specialists have built large firms based on the success of tax avoidance (not to be confused with tax evasion) and minimization strategies. Even Canada’s former Finance Minister (who became Prime Minister for a short time), Paul Martin utilized a corporate structure in Barbados to operate Canadian Steamship Lines (CSL) - to have a legal effective tax rate of less than 2%.
Is it this extreme form of tax avoidance that is causing politicians to believe they need to change the tax code? Maybe, but this type of behaviour was not addressed during the recent proposals. The recent proposals brought forward by Prime Minister Trudeau and Finance Minister Morneau appear to many to be politically motivated to garner support from the unions, as well as an attempt to finance the largest non-recessionary or wartime deficit Canada has ever experienced. On the other hand, we have heard others argue that it is simply tightening the rules to adjust for those who have taken advantage of grey areas within tax legislation. Regardless of the reasons, if fully enacted the impact may be harsh and potentially crippling for family businesses.
Hopefully, due to significant and critical feedback from small business associations and professionals such as medical doctors, there will be a rethink of the proposals along with an extended consultation and review period that will allow a better understanding of any implementation and potential consequences of the proposed tax changes.
At Northland Wealth we understand the importance of private capital and the important role it plays in Canada. We continually work with external tax experts and monitor proposed legislative changes that could impact our clients’ private capital. By being proactive and looking at ‘what-if’ scenarios, much the same as we do with our investment approach, we have the ability to work with our clients to make the necessary changes to their strategies in order to achieve better outcomes for their financial goals.
If you or your family have any questions or concerns over the proposed tax changes for private corporations our team would be happy to arrange a time to meet and discuss your situation.