Small business people have trouble seeing the fairness in the federal budget

By Jim Portside

April 21st, 2024

BURLINGTON, ON

How am I doing so far asks the Minister of Finance

Here are a couple of quotes from Finance Minister Freeland’s budget speech.

“We are making Canada’s tax system more fair by ensuring that the very wealthiest pay their fair share,”

“We are doing this because a fair chance to build a good, middle-class life — to do as well as your parents, and grandparents, or better — has always been the promise of Canada.”

Who are the wealthiest Canadians?

Do you own a cottage, rental property, or vacant land.

Do you run your own business?

Self-employed?

Congratulations, you may qualify for the 1% of the 1% that the government is telling us is being targeted by the 2024 budget.

Maybe you bought a cottage in 2001, for $100,000, now you’ve retired and you sell the cottage for $600,000. The capital gain is $500,000.

Under the old rules, you would have to add $250,000 to your taxable income.

Under the new rules, as one of Canada’s wealthiest Canadians, you add $290,000 to your taxable income.

Big deal, the difference is only $40,000, but wait, winner winner chicken dinner, you’re now in Canada’s highest tax bracket.

If you sell your cottage today, without any other income, you’ll pay $93,047 in taxes. Under the new rules you’ll pay about $10,000 more.

Selling a cottage could have expensive income tax implications.

No worries, just hop in your private plane and fly up to the cottage. Oops, I forgot, you sold the cottage for some retirement income.

For people who own their business or are self employed, accountants often recommend setting up a holding company. With the tax changes made in 2019 and with this budget change this approach may no longer make sense.

Holding companies don’t qualify for the small business tax deduction. Before this budget they were fairly taxed. By the time the money gets to you personally you pay the same amount of tax as if you did not have a holding company. With a holding company you can smooth out your income over a long period of time. Have a great year, leave some money in the holding company, have a lousy year, take some money out. Retire, start taking money out, just like a pension plan.

Small business owners work hard, create employment and don’t have access to guaranteed, government funded, defined benefit pension plans.

Holding companies don’t qualify for the small business tax deduction. Before this budget they were fairly taxed. By the time the money gets to you personally you pay the same amount of tax as if you did not have a holding company. With a holding company you can smooth out your income over a long period of time. Have a great year, leave some money in the holding company, have a lousy year take some money out. Retire, start taking money out, just like a pension plan.

Anyone who is retired and had planned, based on the tax rules of the day, to fund their retirement from a holding company, just got …. by the government. If the government wants to make this fair, then capital gains inside the federal public service pension plan need to be taxed as well.

Now, guess who retired before 2019 and used the recommended and legal accounting practices of the day to plan for his retirement.

Jim Portside is a retired information technology business man who sold his company in 2017.  He doesn’t have a cottage, no plane; he does fly kites.