Proposed changes to the federal tax scheme for small businesses may be the right idea, but are taking too broad of a swipe, according to Penticton and Wine Country Chamber of Commerce president Neil Wyper.
The federal government’s proposed changes would close three loopholes the Ministry of Finance said are used by high-income individuals to avoid paying their share of income taxes.
Wyper said he’s still waiting to hear from members to develop a full response to the proposed changes, but offered a general uneasiness about the proposals.
“It’s difficult for the government to suggest that taking advantage of rules that have been around for a long time that help families create new business in our community are suddenly being categorized as a loophole,” Wyper said.
“At the chamber, we want to make sure that our members give us some feedback on whether we should come down on the side of agreeing that this is a loophole that needs to be cleaned up, or whether the small businesses should continue to be supported in that way.”
But Wyper said he’s erring on the side opposing the changes at this point, citing the benefits to small businesses in Penticton.
Among the loopholes, the federal government is taking aim at “income sprinkling.” An individual making $200,000 will pay more income tax than another making the same amount of money, but incorporating their small business and paying portions of that money to their family members.
The second loophole is the “passive investment income,” in which corporations can hold money as excess revenue in the business, rather than paying out a personal income — at a higher tax rate — or investing in growing the business.
The third and final loophole the federal government is looking at is on capital gains, which are also taxed at lower rate than high-income earners. According to the ministry, individuals can pay out their own income as capital gains and avoid paying higher taxes.
While the federal government wants to take aim at those exploiting the loopholes, it also acknowledges on each point that there are legitimate uses of those tax functions, and that’s what Wyper says he’d like to avoid penalizing or removing.
“There’s certainly arguments on both sides, and I think that the biggest issue that I’ve heard is that it’s coming down, really, as a blunt attack on all businesses that are approaching it from this way,” Wyper said.
“(If) somebody’s taking advantage of it, perhaps, it seems unfair, maybe there could be a more nuanced rule that approaches that situation, instead of simply saying that everyone that takes advantage of this is in the same category of being a bad business.”
Wyper acknowledged that would likely add more bureaucracy to the system, but said that shouldn’t stop the federal government from trying to differentiate between tax avoiders and those who follow the rules as they were intended.
“We’re talking about the Income Tax Act, which is ridiculously complex to start with,” Wyper said with a laugh. “Of course any nuance creates more complexity to it, but at the same time they need to find some balance of fairness that lets businesses thrive and take advantage of opportunities to grow.”
In particular, Wyper expressed some concern for the passive investment income changes, noting that corporations should be encouraged to hold money in their coffers for “rainy days,” such as a downturn in the economy or a dip in business.
It’s hard to say at this point how many Penticton businesses the changes would affect, with all of the changes affecting only corporations, but Wyper said it could reach everywhere from the larger businesses in the city to the mom and pop shops.
“It’s incredibly common for a mom and pop shop to be just one or two shareholders,” he said. “So, all of those things would be captured by it. And of course we go from the smallest family business right up to — the small- and medium-sized businesses they’re talking about are quite large, potentially.
“There’s a whole lot of variation among those categories about who’s reasonably investing in the future and who’s reasonably sharing income between a couple, and then the other side of people that are, perhaps, taking advantage of things, being what’s perceived as an unfair way.”
Wyper said the chamber will be sending out a survey to their members to gauge a more solid position on the matter, with the expectation that they will be submitting their results to the federal government for its consultations.