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Union Gospel Mission

True dough for Trudeau

By Arnold Michel, CFP

“Since the word of the king is authoritative, who will say to him, ‘what are you doing?’”  Ecclesiastes 8:4

Tax changes are afoot. Maybe you’ve heard about some of the proposed changes on the news or read about them on social networks or in newspapers such as this one. The proposals will affect almost all of us in one way or another… and probably not in a positive way.

Whether you love him or hate him, Trudeau’s foray into tax reform has not been popular. For now he has backed off targeting those who get employee discounts, but his proposals for small business still stand and will have severe negative consequences for our nation, for farmers and doctors and small business owners (who provide the majority of jobs in this country) …and quite possibly for you, too.

The Liberals propose to eliminate tax loopholes that give advantages to small business owners. Specifically, they are looking to stop…

Income Sprinkling

Some business owners sprinkle income to family members by way of salary or wages, or dividends, to reduce the family’s overall tax burden. In some cases, they “game the system” by paying them more than they should.

Quite frankly, there are already rules in place to prevent unreasonable salary or wages from being paid to family members who are not truly earning the compensation they receive.  Simply enforcing the existing rules would resolve 99.9% of these issues; much better than adding even greater complexity to a system that’s already too complex.

Passive Income

This is the one that I have the greatest concern about.  It will hurt average taxpayers by making their jobs far less secure. Corporations (big or small) already pay 50% in taxes on passive income. Under the proposed changes individuals will be taxed up to 73% on investment income paid to them from their companies. Companies will be penalized for preserving capital.

Why should you care? The new system would strongly discourage business owners from building up reserves for lean times, by increasing the tax on the income from those reserves. Without strong treasure chests in the business, they will be far more likely to lay off staff during lean times. So, the unintended result of this will likely be more frequent and more severe layoffs in slow times due to the huge financial disincentive to keep money not needed for day-to-day operations in the corporation.

Converting Income to Capital Gains

This is one issue that does need to be dealt with, but not in the way proposed.

Complex steps have been taken by some owners to convert what would be salary or dividends into capital gains which are taxed preferentially. Section 84.1 of the tax act was developed to deal with this issue some time ago, but amendments are needed to strengthen the application of this act. Unfortunately, the proposals would have assets left to the next generation (a farmer leaving his farm to his son for example) taxed at up to 93%, making it virtually impossible for any small business owner to pass their business on to their heirs. They will effectively be forced to sell their business to a third party before they die.

It’s likely that the cost of creating and policing the first two measures will far exceed the gains to the government coffers. The changes will encourage bad business behaviour that will lead to more business failures and the loss of jobs, both temporary and permanent. Should they pass, it’s likely that our medical system will suffer as the assault on doctors is likely to drive many down south.

Conrad Black who, by the way, advocated strongly in favour of a Trudeau government, has the following to say about the tax changes, “The proposed tax changes are important and groundbreaking, but after careful study, I must conclude that they are almost entirely bad for the country. They constitute a violent assault on small business, the self-employed, private companies.”

In a word, it is an assault on a whole range of traditional values, though it is, like all tax increases, dressed up in the threadbare raiment of fairness and elimination of loopholes. Lawyers and some doctors will be singled out for particular oppression, which to opponents of this nasty and dangerous legislation is welcome, given their political influence and the bar’s skill at lobbying. If implemented, these rules could drive large numbers of doctors out of the country.

At the end of the day, these are poorly thought out tax initiatives that will have wide-ranging, negative consequences for most of us that far exceed any possible benefits. I urge you to educate yourself and let your local MP know where you stand. Trudeau has already backed off taxing employee discounts due to a backlash from tax payers. With enough support, he may back of off some of these proposals as well. The Trudeau government has indicated a willingness to consider backing off on some of the proposals. Let’s keep up the pressure.

Arnold Machel, CFP(r) lives, works and worships in the White Rock/South Surrey area. 

He attends Gracepoint Community Church where he serves on the Leadership Team. 

He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca

Please note that all comments are of a general nature and should not be relied upon as individual advice.  While every attempt is made to ensure accuracy, facts and figures are not guaranteed.

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