By Justin Seward
Medicine Hat-Cardston-Warner MP Glen Motz hosted the official opposition’s shadow minister of finance, the Hon. Pierre Poilivere, in a town hall meeting at the Medicine Hat College to discuss the anti-tax change in defense of farmers and small businesses on Sept. 22.
The tax change was proposed by the federal Liberal government in July.
“Small business is the backbone of our economy, employing over 8.2 million Canadians (70.5%) of the total private labour force,” stated Motz in a press release.
“But the government’s proposal to increase taxes on the investment income of small business operators to 73 per cent, will force middle class farmers and small businesses to spend more on compliance and red tape. I have heard from and met with numerous accountants, physicians, farmers and a wide variety of small business owners, who are extremely concerned with the negative impact this proposal with have on our community, escalated unemployment, and closure of small business.”
Poilivere termed Medicine Hat “The Agricultural Heartland of Canada,” and not unlike the riding he represents south of Ottawa, there are lots of family farmers and this is a town filled the energy sector with gas and some oil and everbody who makes the sectors work together.
He said to the people in the theatre crowd that they have probably heard about all of the small business people are rich and trying to avoid payint their fair share of taxes as that has been Prime Minister’s characterization.
“First of all it is not true that small business owners are principly rich,” said Poilivere.
“Two-thirds of them make less than $73,000 a year, one-third make less than $33,000 per year. We’re talking about the middle class.”
The first change proposal is the income sprinkling where currently farms and local businesses are famuly venture including spouses, siblings and children all pitching in. The business can compensate them. The Liberal plan would have the government impose a “reasonableness test” on the family businesses and farm to determine if family members are “earning” their income. This means higher compliance costs and government intrusion into family businesses, while big businesses wil not face the big burden.
“MMP, which is a major accountancy, is advising farm spouses to begin the process of keeping track of all the work they’re doing around the farm,” said Poilivere.
“Now as you know this will be very difficult because much of the work is hard to define. When the husband and wife are at the dinner table at the end of the day having dinner and talking about the strains that will come from a year of low commodity prices or having reigns, they’re actually working but they’re also having dinner. When the husband decides they’re going to mortage some of the property in order to make an investment, both of them are actually taking a risk because if it goes wrong they both lose. We don’t know whether the reasonablesness test the government wants to impose will take into consideration those very real risks and those very real contributions when for example a farm spouse is allowed to be paid.”
The second change is passive income where local businesses can save money within their companies for unexpected emergencies, downturns and retirement and earnings are taxed at withdrawl at the full marginal rate.
Now the Liberals are proposing that the government will tax investment income in the company twice: once inside the company and once upon withdrawl. This will amount to a total tax rate of 73 per cent and big business will not face this added tax burden.
Poilivere said for example if you have earnings from your active business activity and be taxed on it today at a rate of about 15 per cent, depending on your products, and have $85 left over and invest that and grow it. Eventually when the money is taken out, the business owner is taxed on the remaining share of the original active income that you were not taaxed on before.
“The suggestion by the government that somehow you’re getting off easy or not paying tax on the original active income that your putting in the past investment is false,” he said.
“When that money is taken out, it’s all taxed in an integrated way to ensure you pay the same tax rate on it as you would have, if it had been a wage.”
The third proposal is capital gains conversions where local businesses that sell assets have the proceeds taxed at the capital gains rate instead of the higher dividend rate.
For the Liberals, they will tax the proceeds of asset sales to non-arms-length” buyers at the dividend rate of 45 per cent.
Business owners will not be allowed to use their life-time capital gains exemption when selling to family. An example is where the farmer would pay a far higher tax rate selling the family farm to son or daughter than if it were sold to a bigger corporation.
If you are a business owner and take advantage of the capital gain exemption, you can receive capital gains of $800,000 tax free while farmers and fishers can gain $1 million tax free.
“A lot of businesses use this as their retirement plan,” said Poilivere
“They can get a large tax-free, disposition off the asset they spend their life building and live off the proceeds. Under this proposal that would not be possible in the event you sell to your kids. This has major implications for our farms. If a farmer were to sell to his son, would have have to be taxed at the dividend rate, as much as 45 per cent. If he sells to a foreign land agregator, he’d be taxed at a rate of 0 per cent on his first $1 million and if he’s married, he’d be taxed on the first $ 2 million.”
The Conservatives will continue to hammer away at the Liberals to get an irrigated amendment to the proposal that is causing damage to the plan.
“It’s important to understand the income sprinkling I just finished discussing is estimated to raise $250 million for the federal treasurery if full implemented as described,” said Poilivere.
“That’s enough to fund the Government of Canada for an afternoon. We have a $300 billion budget right now. The money they were going to collect through all these complicated rules is I doubt is going to even cover the compliance costs and the administration and enforcement costs.”