Length and listen is the advice a successfully retired small business person has for the Minister of Financne

By Joe Gaetan

September 14th, 2017

BURLINGTON, ON

In order to understand why Prime Minister Justin Trudeau and Finance Minister Bill Morneau are on the wrong track when it comes to small business taxation, Joe Gaetan explains that they have to understand what small businesses are all about, how they tick, the challenges they face and the risks they take.

“According to government statistics, approximately 80,000 new small to medium sized businesses (SME’s) are born and about 80,000 cease to exist each year.

Where does your funding come from?

“To start a business you need seed money, in 2014, 51.3 percent of SME’s sought external financing, compared with 48.7 percent that did not request external financing. If a small business owner funds his or her own business they are doing it with after tax dollars, something many people forget. If they borrow from a bank they will have to collateralize the loan which means if things go awry they could lose their home. Lacking both a credit history and the collateral needed to secure a loan, over 80 percent of start-ups face great risk by personally financing their new businesses. On top of that one should know that small business owners (SBO’s), doctors, farmers, restaurant owners are not tax cheats.

Retirement is not a sure thing.

“SBO’s have no pensions, let alone indexed pensions, no stock options with generous tax treatment, no health benefits, no sick day benefits, no vacation benefits, no golden parachutes and no help from Provincial and Federal politicians. When it comes to vacations and sick days, small business owners lose income when they are away, but their expenses continue and they usually experience a drop in income for however many days they are away. Generally speaking small business owners have no entitlements and no security blankets to get them through any rough patches. The same cannot be said for government workers, politicians, teachers and employees of many public and private enterprises.

“The government recently issued a 63-page white paper on small business taxation that requires an in-depth understanding of tax law, something most small business owners do not have. The paper targets, income sprinkling (income splitting), earning passive investment income in a corporation and converting a corporation’s ordinary income into tax-preferred capital gains, using net income examples that any business person would be happy to enjoy, but is far from representative of small business net-income .

“The article states that,” income sprinkling” (a catchy term used by Morneau to denigrate what is really income splitting),“is perhaps deemed the most offensive” and “the one that will likely have the broadest financial impact on small business owners and incorporated professionals”. The latter is an understatement if there ever was one.

They don’t exist in the private sector where the Small Business people thrive.

“Large banks or any large corporation for that matter, can put whomever they like on their board and can sprinkle them generously with stock options, that when exercised are favorably taxed, one could say “that” practice is a major loophole, but it isn’t, it is perfectly legal under our tax code. Why? Stock options usually carry a 10-year life span which allows the grantee the luxury of exercising them when the time is right and when exercised, only 50% of the gain is taxable. In lay terms, imagine how happy you would be if only half of your income was taxed.

“This is costing the government and therefore us about $800 million a year in lost tax revenue, but the government would sooner tax the small business owner.

“At present small business owners can share part of their income with their board of directors. That could include one or more members of the family, including their spouse and children. Money taken out by a family member would be taxed at the rate for the person who benefited from the income. The family member in question may have little or a lot to do with the day to day operation of the business. One of the arguments against this is, small business owners use this money to put their kids through school, but what about the free tuition that is granted to children of university employees, is that not the same thing, is that not a non-taxable benefit and therefore a loophole that needs to be plugged?

“To understand the full impact of the impact of the attack on “earning passive investment income in a corporation and converting a corporation’s ordinary income into tax-preferred capital gains, you should know that prudent small business owners keep between 90 to 180 days of cash in the bank to get them through low business cycles and unexpected events like Sep 11, 2001 or 2008, two events in recent times that had a negative effect on small and large businesses. Except the “too big to fail companies” were helped while small business had to surf through it with zero help.

Prime Minister Justin Trudeau, right, goes face-to-face with Finance Minister Bill Morneau Photo credit – THE CANADIAN PRESS/Sean Kilpatrick

“So, if you are looking for income stability or longevity, starting an SME may not be your best choice, and especially after the Trudeau/Morneau juggernaut has gutted some of the few benefits of being a small business owner. Some of the so-called loopholes the Trudeau/Morneau team wish to eradicate are in fact are a legitimate vehicle by which small business try to squirrel money for their retirement years.

“If the government is serious about fair tax reform they should at least do the following:”

Lengthen the consultative window to at least 6 months

Start listening to the many non-partisan tax experts who understand the tax laws and small businesses and are ready willing and able to contribute in a meaningful fashion.

Joe Gaetan spent 13 of his fifty years of uninterrupted employment as a small business owner.  He operated a Laser Smoking Cessation business, treating over 5,000 during the the life of the business. He retired from that business in 2013. Prior to that he worked  for a Fortune 100 company.