Context missing from proposed changes to Canadian tax law

In the midst of great success and innovation, it’s easy to lose sight of the sacrifices that entrepreneurs make when they set out to launch a business. Savings accounts are drained, homes are re-mortgaged and strain is placed on the family members who are there to support their loved ones in achieving their dreams.

The consultation period for a controversial set of tax changes proposed by the Liberal government recently came to a close. While the changes are framed as a way “to ensure that high-income individuals cannot use strategies involving private corporations to gain unfair tax advantages,” they’ll ultimately be most harmful to one of Canada’s most vulnerable business sectors: entrepreneurs.

It’s now up to the government to take the feedback received throughout the consultation and table their proposed changes in accordance with it. While the ending remains to be seen, it shines a spotlight on the challenges that entrepreneurs -- particularly those in the early stages of launching their business -- face under Canadian tax law.

What is fair?

The main concern presented throughout the proposal and by Finance Minister Bill Morneau since its release has been fairness. To anyone who’s ever had a hand in the launch or the running of a small business or startup, the suggestion that entrepreneurs receive any undue benefits is laughable at best and insulting at worst.

Of the roughly 100,000 new businesses launched each year, 80 per cent of them are financed with personal funds. Only half of these will survive past five years.

While only about four per cent of Canadian employees work 50+ hours each week, this is a regular occurrence for entrepreneurs. In many cases, they end up working well over 50 hours, in fact.

Approximately 86 per cent of businesses in Canada have fewer than 20 employees and it is the business owner who goes without a salary, maxes credit cards and refinances mortgages to ensure their staff get paid.

It is absurd to compare entrepreneurs and employees and conclude that these proposed changes create any sort of “fairness” between the two. Entrepreneurs are an important part of the Canadian economy, with small businesses employing approximately half of the country’s working-age population. The backlash to the proposed changes wouldn’t be so severe if businesses across Canada felt that our tax laws were already fair as they apply to entrepreneurs.

What is reasonable?

One section that was particularly problematic in the proposal was the example of income sprinkling, which pits hypothetical neighbours Jonah and Susan against each other. While both earn $220,000 annually for their single-income households, Susan, an employee, pays $35,000 more each year in taxes than her neighbour, who owns his own incorporated consulting business.

What the staffers who came up with this example failed to include is context.

By the time the average business owner is taking home a predictable $220,000+ of annual income -- if they ever get there -- they've already put themselves out on a tremendous limb and likely had years with no income.

The spirit behind these changes is flawed dramatically and does not reflect the personal sacrifices that occured to get there.

Susan Richards is the co-founder of numbercrunch, a one-stop-shop for business financial services. The company offers cloud-based bookkeeping, and virtual CFO and Controller services. To learn more or to request a quote, visit www.numbercrunch.ca.