With thanks to Carmen Mackenzie, Nova Scotia Canada 2017 - Small Business Taxation

Carmen, a great lady from Nova Scotia, has just shared the following information for the general public, please read and share with others, thanks:

"For anyone interested, below is a copy of my 9-page letter to the Finance Dept. in response to their public consultation on proposed tax changes for incorporated small businesses and professionals. (Sent last night, the final day of public consultation.)

I've also sent it to Justin Trudeau, Bill Morneau, my local MLA Keith Colwell, local Con. Senator Tom McInnis, Premier Stephen McNeill, Con. Finance Critic Pierre Poilievre, Lib. Finance Committee Chair Wayne Easter, my Lib. MP Darrell Samson (who has with leadership and courage spoken out in opposition of the legislation) and over 300 MPs across the country.

They wanted to hear about unintended consequences, and how the draft legislation would impact real people on the ground.
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Re: Feedback on the Federal Tax Proposals for Small Business

I’m writing today to share my concerns about unintended impacts of the federal government’s proposed tax changes to incorporated small businesses and professionals. My feedback comes from personal experience and from listening closely to the stories of honest, hard-working, risk-taking, big-dreaming people from across the country.

While the majority of my working life has been spent in non-profit and public health, I left the public sector nearly four years ago. I am the wife of a thriving small business owner in precision machining and manufacturing, the recent co-founder and partner in a new medical technology business, a daughter in a family of small businesspeople going back to my late grandfather. I’m a mother of three, an advocate of fairness and social justice, and in the last federal election I voted Liberal. I’d grown increasingly frustrated with the Harper government’s tightening of message control and their stifling of open dialogue and decision-making. I was looking for a change – for a hopeful optimism, a unifier, a more inclusive and transparent government – and I felt Justin Trudeau just might bring that change.

Who knew that barely two years later the Liberal government would have me deeply regretting my decision.

With a Robin Hood-esque message, your government has proposed small business tax changes as a tax on the wealthy. You’ve positioned them as an opportunity to make the tax system fairer, ensuring the wealthiest Canadians aren’t “using loopholes to pay less tax than the middle class and those working hard to join it.” (Great sound bite, by the way.)

Problem is, the changes you’ve proposed aren’t targeting the wealthiest Canadians at all. It’s a false narrative – an Alternative Fact, if you will. You’ve rushed through a consultation that confused even the experts in tax law, and your key spokespeople on the issue – Prime Minister Justin Trudeau and Finance Minister Bill Morneau – continue to avoid answering legitimate questions asked of them, repeating instead a memorized set of robotic key messages that include the words “happy to,” “fair,” and “strengthening the middle class.”

As a mother who’s teaching my children to tell the truth even when it’s hard, and to take responsibility for their actions, even when it requires an admission of guilt for unintended consequences, seeing this type of behaviour play out in our country’s most powerful and honourable positions makes my stomach turn.

To see our government’s leaders act so smugly, with such disrespect to the working class Canadians who voted them in and who have legitimate questions is, frankly, disgraceful.

~ Who you’re impacting, and who you’re not

Justin Trudeau and Minister Morneau keep saying the tax changes will ensure the wealthiest Canadians will pay a little more, but your proposed legislation has almost nothing to do with income level and instead targets a certain segment of working class Canadians who provide our country’s food, health care, innovation, job creation, export revenue and middle class tax base.

In fact, based on the criteria outlined and confirmed by Minister Morneau during the meeting of business owners in Halifax on Sept. 22 – a meeting my husband attended – the proposed changes will not have any impact on anyone making for example $173,000 working in the public sector, or earning $2 million as a CEO of a publicly-traded billion-dollar international company, but they will impact the small business owner making $155,000. Those are confirmed examples, in Minister Morneau’s words.
How is that, in your words, “fair” or “ensuring the wealthiest are paying a little more?”

~ Someone’s Foolish, Let’s Get Rule-ish

This legislation is a textbook example of the “Someone’s Foolish, Let’s Get Rule-ish” style of management where one person in a professional office building wears Daisy Duke shorts to work, and rather than disciplining that one person and correcting his behaviour, the management team drafts a hastily-written manual outlining what everyone can and can’t wear (with obvious holes and misguided examples), begins policing all staff as they walk through the doors in the morning, and starts penalizing people for not adhering to the new, ill-thought-out rules.

This type of careless, knee-jerk management style not only avoids directly addressing the handful of people who deserve to be reprimanded, it also results in vast amounts of time and energy wasted drafting new rules, monitoring and policing the majority of people who weren’t doing anything wrong to begin with. Worse, in the process, the leaders create a culture of fear and suspicion across the whole organization. Some of the top performers leave, and the ones who stay behind feel judged and betrayed. All for the sake of correcting one person’s behaviour.

Unfortunately for Canada, the Someone’s Foolish, Let’s Get Rule-ish manhunt you’ve embarked on within the small business sector has similar yet far greater consequences.

~ Income sprinkling – equal risk, equal rights

It’s reasonable for your government to be questioning the practice of sprinkling income among three or four (or more) family members.

But I strongly believe that income splitting between spouses or common-law partners is entirely appropriate for small business owners, and that it’s a legitimate measure that should be protected.

The Supreme Court of Canada addressed a somewhat parallel concept on its 1980 decision of Petkus vs. Bekker when Justice Dickson and the court applied the concept of a constructive trust to a spousal relationship. The court found that a common law spouse cannot be unjustly enriched by the other spouse’s contributions into a family asset or business. These amendments attempt to codify the pre-1980 perspective that a common law spouse should have no expectation of compensation despite her contributions into her partner’s endeavors.

The Supreme Court of Canada in 1980 overturned the prehistoric notion that only the farmer’s contributions were worthy of compensation. Finally, farm wives were acknowledged for the equal role they played in contributing to the farm’s success.
Today’s couples who take on the risk-filled life of an entrepreneur are no different than the farming couples of 1980. Do we really need to revisit this issue through an ill-conceived tax reform?

~ Our story (not just his)

When my husband started his manufacturing business in 2006, we didn’t have a pot to pee in. He’d dreamt of starting his own business and I saw potential in his dream, so I moved across the country from B.C. to his home province of Nova Scotia to give it a shot.

At 25, I used my savings to put a down payment on our first home. Three months later, he rented a bay in a government incubation shop, and with credit union loans and a $5,000 loan from his parents, he purchased his first two machines.

My bi-weekly paycheque covered all of our personal bills – our mortgage, utilities, insurance, Kraft Dinner and gas – and whatever was left went to purchasing metal and supplies for the shop because we had zero cash flow. His customers had payment terms of 60- or 90-days, but his material suppliers needed their money sooner. Who floated the business during that time? Me. For how long did we do this? Who knows. When you’re scrambling to stay afloat, things like that don’t even make it onto your radar.

Aside from the undocumented financial investment I made during those early years, I can't tell you how many hours I spent at home, after putting in my 8:30-5 job in the public sector, sanding sharp edges off thousands of tiny parts by hand. I couldn't begin to tally up the weekends I spent punching holes in metal objects, sweeping the shop floor, entering data, buying supplies, making deliveries, writing marketing material, creating content for the website or researching potential customers.

Starting up a company like ours takes more work than one person can possibly do alone. We both had to roll up our sleeves—right up to the armpits—to make it work.

Not in a million years could I go back and accurately account for the hours my husband and I put into the business before he was able to take out a salary. By the time we were making enough revenue to pay someone, we needed it to hire our first employee. And then another piece of equipment. And so it went: as revenues increased, we invested them back into the company in the form of equipment and people. I continued working in the public sector where I was guaranteed a regular paycheque and health benefits, and my husband didn’t take an income for three years.

It was our assets—not just his—on the line. I had to personally sign over the home I'd purchased as collateral for the bank in case things went sour. (A real possibility, of course, as the vast majority of small businesses do go under within the first five years.)

My experience echoes similar stories from spouses and common-law partners across the country, and it isn’t unlike those of the farm wives from 1980.

Even if I hadn’t contributed directly to the activities of the business, however, how could a CRA agent adequately determine the value of my contribution in monetary terms? It would be ludicrous to conclude that spouses who take care of every other aspect of family life – groceries, meals, cleaning, yard work, house and vehicle maintenance, school and kids’ activities – haven’t contributed to the success of the business when their contribution allows the breadwinner to work 12-14-16 hours a day, five, six or seven days a week.

I firmly believe that whether a partner has or hasn’t contributed financially to the business, or actively worked in the business: if he or she assumes an equal risk in losing his or her home and livelihood if the business fails, then he or she ought to also assume an equal right to the success of the business.

Why should farm wives and their counterparts in other sectors of the small business world be treated as equals in the family business, regardless of how much they reasonably contribute to the activities of the business? Because even the Supreme Count of Canada in 1980 finally recognized the contribution of farm wives as equal to the contribution of the men in the field.

And because… well, it’s 2017.

~ Taxing passive investments: stifling growth

My husband was one of the seven or so businesspeople in the room Sept. 22 at the Halifax Central Library when Finance Minister Bill Morneau explained his rationale for taxing passive investments within holding companies. Morneau’s argument went something like this: why should a small business who is, for example, generating revenues at the high end of the small business income level of $500,000 be allowed to hold, say, $400,000 of that in passive assets?

First, some businesses, like ours, require significant sums of cash to be available at a moment’s notice for capital investments and time-sensitive opportunities.

A concrete example: with Irving’s success in winning the shipbuilding contracts in Nova Scotia, local small businesses like ours have the opportunity to bid on some incredible manufacturing contracts in the years ahead. These contracts, however, require a significant investment of capital to take them on – massive equipment purchases, additional employees, potential building expansion, liability insurance, etc.

If we know today, for example, that we want to bid on a large-scale contract coming down the pipeline in three years, it may take us the entire three years to build up enough funds for the capital required. For context, one piece of precision machining equipment in our shop can cost over $200,000 plus delivery, installation, training, etc. We’ve had years where we’ve been fortunate enough to be awarded contracts requiring the purchase and installation of two such machines in one year.

These contracts are exciting: they allow us to bring work to Nova Scotia, sometimes from other countries and as far away as China. They allow us to create new, secure, well-paying jobs with benefits to a rural community. Like so many small business owners in Canada, this is what drives us.

But preparing for these contracts requires saving – a lot. The more interest we generate within the company after having paid the small business tax on our investment, the quicker we can position ourselves to take on these contracts. And in real terms: that means more jobs, better benefits for our employees, more municipal, provincial and federal taxes from all of us, and our ability to contribute to a thriving local economy.

If you proceed with the proposals to tax the interest made on investments within the holding company at a staggering 73 per cent, you’re stifling the ability of small businesses like ours to dream big. You’re saying our ability to save and invest back in our business should be penalized. I’d argue that your government could learn a thing or two from businesses like ours that can both dream big and spend and save wisely enough to cover the costs of those dreams.

~ Is it unfair to benefit from a risk you’ve chosen to take, or an investment you’ve chosen to make?

Your government continues to say that these benefits are only available to a small percentage of Canadians. They are, in fact, available to any Canadian who wants to take on the risk and cost and opportunity losses of starting their own incorporated small business.

~ Taxing passive investments: Big Business in other countries will benefit

Not only do the funds in the holding company allow us to save for capital investments, they allow for the flexibility to try new things, invest in innovative ideas, pursue worthy opportunities and start new businesses.

I left my career in the public sector nearly four years ago to begin a family. While on parental leave, I decided not to return to my job, but co-founded a new business with my husband that I believe will improve lives, create more jobs in Nova Scotia, and create export dollars for Canada.

In partnership with NSCC, our local community college, and a long-term care facility, my husband was working to help solve the costly problem of health care workers becoming injured while repositioning people in wheelchairs.

Fast forward three years – and several hundred thousand dollars from within our holding company later – we are finalizing our device and about to begin clinical trials.

We couldn’t be more excited about the potential of this invention. It’s game-changing technology. We hold (expensive) patents in Canada and the United States, and have applied for an international patent that would allow us to sell our product overseas. We’ve gone through the regulatory checks and balances required of medical devices. Getting to this point has generated work for a local engineering firm, a contract engineer, a graphic designer, a local textile fabricator, and our 25 employees, and soon we’ll require the services of data and app companies. We haven’t sold one unit, but we’ve stimulated our local economy and, as entrepreneurs do, we’ve risked the family farm… again.

We’ve received interest from investors and distributors in the U.S., and we’ve had seasoned business advisors suggest that rather than take on “the headache” and expenses of starting up a second manufacturing facility, we simply license the technology to a big U.S. firm. “Less stress,” they say. “Give someone else the work and the risk, and collect the cheque.”

We discussed licensing the technology to a bigger company as a viable – and possibly much smarter – option, but we’re not in this for a get-rich-quick scheme. Like other Canadian small business owners, we’re the type of people who enjoy a challenge and we’re motivated by the idea of changing lives, contributing to our community, and leaving a legacy.

The ability to accrue greater returns on investments made within the small business tax bracket have allowed us the flexibility to innovate and grow sooner and more aggressively. It’s allowed us to put hundreds of thousands of dollars into our medical device, and we’re only halfway there.

The passive assets your government is referring to as “loopholes that allow wealthy Canadians to avoid paying their fair share” have enabled a dream to partially materialize. If all goes well in the months ahead, it will allow us to create more good jobs in rural Nova Scotia, hire other types of businesses to support our growth, and create export revenue for our country.

If your proposed tax changes go through, the road ahead will become much more difficult, and the option of licensing – or selling altogether – to a foreign company will be far more appealing.

~ This isn’t about the wealthy one percent – at all

Minister Morneau confirmed at his consultation in Halifax that the legislation will not affect high-income salaried earners, neither private nor public sector employees.

Morneau confirmed, for example, that an MP earning the base salary of $173,000 will not be impacted by the proposed legislation, nor will money invested into her pension be taxed on the way in, nor will the interest she builds on her pension investments be reduced or taxed more in any way.

Nor will these changes impact the CEO of the Fortune 500 company who earns a salary of $2 million and receives an additional $5 million in stock options, on which only half is currently taxed.

Nor will these changes impact inherited family fortunes, multi-million-dollar shareholders of publicly-traded companies, wealthy Canadians who register companies in Bermuda tax havens, nor Canadians who register a numbered company in a lower taxed province than the one in which they reside and operate. Those ultra wealthy Canadians remain sheltered from the proposed tax changes.

~ Capital gains exemption: wiping out the family farm and general store

Family businesses are more than just a registered number and a source of revenue for the Canadian government. Family businesses offer a sense of community pride, a tangible example of work ethic passed on through generations, and a glimmer of possibility in a country otherwise entrapped by big box stores and brands owned by a handful of the world’s most powerful elite.

I’ve heard the example used by government of the unscrupulous business owner who sells the company to several family members to clearly abuse the lifetime capital gains exemption, and if those are the people you want to circumvent with tighter legislation, I support you. A scheme like that is a clear abuse of the system, and measures should be put in place to prevent such obvious tax evasion.

But your proposed legislation won’t simply prevent abuse; it will place a grossly unjust penalty on farmers and family business owners who want to legitimately sell the business to the next generation.

What good comes from making a small business owner pay more to sell the family business to her son than to a complete stranger?
Under your proposed changes, there will be a huge disincentive to keep family businesses in the family. How is that helping the middle class?

~ Comparing apples to volleyballs

In attempting to illustrate how unfair our current tax laws are, Minister Morneau has described a comparison between two households. In it, he paints a grossly oversimplified picture that misses an entire section of the canvas.

His comparison: in one household, a single mother of two children earns $200,000/year. Her neighbours, a couple who own a small business who also have two children, earn $200,000/year and split their income in half, allowing them to pay about $12,000 fewer taxes annually. Minister Morneau said the government doesn’t think it’s fair for the couple to pay less tax than the single mom simply because they own their own small business and she works as an employee.

What the minister, and your government, is missing in this comparison is the detail that makes the comparison akin to apples and volleyballs.

While the single mom is working as a salaried employer, she’s likely contracted to work eight hours per day, five days per week. She receives medical and dental benefits, paid vacation and sick time. If she’s injured or becomes ill, she’s eligible for short-term or long-term disability benefits. If she becomes pregnant or loses her job, she’s eligible for EI. She likely spends evenings and weekends with her children, and is working towards a guaranteed retirement pension that was invested tax free and has been subsidized by her employer.

The couple next door who are self-employed, however – if they’re like most self-employed start-ups – probably work 12, 14, 16 hours per day, six or seven days per week. They pay for their own medical and dental benefits. They are unlikely to take vacation for several years. If or when they do take vacation, it’s not like a salaried employee’s vacation: the small business owner is always on call, always available. Becoming injured or ill can mean losing everything, and the couple is not eligible for government assistance if the worst case scenario materializes. Their family dinners and weekends are never far from a discussion about work, troubleshooting an HR issue, putting out fires. The couple needs to save enough to cover for pregnancy, unforeseen circumstances and rainy days, and selling their business may well be their retirement plan. There are no guarantees. Their present and future are unpredictable, risky and without a government safety net.

Comparing these two neighbours based on income alone misses the other half of the full picture. If the self-employed couple earning the same amount for their household pays for all of their benefits out of pocket, has to self-fund rainy days and retirement, assumes enormous risk working untold hours, is $12,000 in tax savings at the end of the year really an unfair advantage?

~ Time for a sober second thought

Your government needs to hit the pause button before implementing the biggest tax reform in over 40 years. With so much at stake, you owe it to Canadians to take the time necessary to get it right.

I echo the recommendation from experts to form a bi-partisan committee at arm’s length from the Department of Finance. Conduct a proper consultation, examine the full breadth of scenarios the legislation will impact, and conduct a thorough impact analysis. Coordinate with other levels of government to move forward rationally with a comprehensive plan to limit collateral damage and loss, and to mitigate any unintended consequences.

More specifically:

• Commit to upholding the Supreme Court of Canada ruling of 1980 that protects and values the contributions of spouses in family farms and other business ventures and allows them to split their income, regardless of their active involvement in the business activities.

• Maintain small businesses’ flexibility and ability to grow, to dream big and to seize innovative opportunities by allowing them to hold revenue in passive assets without being penalized with an additional tax on interest earned. Understand that countless innovative entrepreneurs aren’t sitting on those investments waiting for them to turn into Lamborghinis or island homes; they’re aggressively building their investments so they can take on new contracts, create new jobs, invent new technology, invest in great ideas and new start-ups, and contribute more to Canada’s middle class than the federal government ever could.

• Don’t make it harder for family farms and businesses to be sold to Canada’s next generations, and on the flip side, don’t make it easier for small businesses to be gobbled up by multinational firms that take revenue to other countries and put profits ahead of people.

• Revisit your election promise to cap stock option deductions that allow extremely wealthy Canadians to truly avoid paying their fair share of taxes.

• Look at the U.S.-based system of taxing business owners at a specific rate, regardless of where they register their numbered company (Bahamas or otherwise).

And if this legislation is truly about taxing the wealthiest Canadians because our infrastructure and social safety nets require it, so be it.

In the name of fairness then, place an equal tax burden on anyone earning more than a certain income level, in any type of job, in any sector. If the interest on investment/retirement savings for small business owners and farmers and doctors will be taxed at over 73 per cent, then start drafting legislation that would apply the same 73 per cent tax on interest earned in private and public sector pensions and other retirement savings tools.

~ Conflict of Interest

I also strongly support the calls for an investigation by the Ethics Commissioner into the real, potential and apparent conflict of interest between the expected increase in popularity of Individual Pension Plans (IPPs) and Retirement Compensation Agreements (RCAs) once the proposed tax changes go through and the Finance Minister’s own and family shares in Morneau Shepell, one of the leading providers of these retirement planning tax tools.

The government’s Policy on conflict of interest outlines that “…public servants take appropriate action to avoid, reduce or manage situations of real, potential or apparent conflict of interest in the performance of their duties and after employment in the public service.”

If a company tied to the Finance Minister and his family stands to gain as a result of new tax legislation, is it not a clear violation of the policy and a textbook example of conflict of interest?

~ Unfortunately, damage has already been done.

If you’ve been listening at town halls, hanging around water coolers, reading through social media feeds, paying attention to what MPs are hearing from their constituents, you’ll have already heard that damage has already been done.

Employees are pitted against employers, believing small business owners are cheating the tax system.

Patients – and even nurses – are questioning the motives of caring physicians.

According to a former Liberal Finance Minister, billionaires (who disproportionately contribute an enormous amount of money to Canada’s tax base) have quietly exited the country.

Amid physician shortages and lengthy wait times for medical procedures, family doctors and highly skilled specialists are discussing moving to other countries, retiring early, or considerably reducing the hours they work or services they offer.

U.S.-based medical facilities have begun paid physician recruitment campaigns on social media using the slogan, “Tired of being called a tax cheat? Join us now.”

Small business owners are considering closing their doors.
Parents are wondering if their children will be able to carry on in their footsteps, and children are wondering whether they’ll be able to afford to… and whether it’ll be worth the risk.

And innovators like us, who Minister Morneau referred to as “the heroes of Canada’s Finance Department,” are asking ourselves… why bother? More specifically, why bother here?

Carmen MacKenzie
Nova Scotia
Wife, mother, spouse of small business owner, co-founder of small business, former public servant, deeply disappointed Liberal voter in last federal election."

www.mackenzieatlantic.com
www.mackenziehealthcaretech.com

Carmen's also put together here ---> a helpful wordpress site