Federal tax proposal has recently gone viral from professionals to small business owners. I have been involved some discussion in the LinkedIn group and found a lot of healthy comments from professionals in various industries. What surprised me are that some obvious issues raised in terms of clarification of passion income and active income as well as enforcement is not being noted by the Government before the so-called Public consultation. Is that called responsibility? I post some highlight here to share with you:
Hurting angle investment
Daniel B: As a result of this I will be limiting my angel investments in private companies and so will many others that I know… this will remove needed capital for entrepreneurs to grow and build business
Demotivating Canadian talents
Elke R: As you know, we work a lot with physicians, lawyers and business owners. Particularly physicians have started making plans to leave the country. These rules seem to be the straw that broke the camel’s back. The “modified” version of the proposed rules continues to be unacceptable. There is really no incentive for physicians to work as hard. Ottawa thinks they are getting the “rich people” but what they are really hurting is the every- day user of the medical system.
Passive investment vs. active investment
Benoit P: The passive income debate is a fallacy when compared to employees. Please contact via VM, but this is what I wrote to my MP about:
1. Pension contributions are made by employers (say 50:50 split between employee and employer) which goes into a tax deferred plan. This contribution on the part of the employer is NEVER taxed during the growth phase or when it is deposited…yet it is a deductible expense for taxable entities. Upon withdrawal, it is taxed, but can be shared with a spouse
2. Passive income is taxed…in fact it is taxed at the high rates…it is only upon withdrawals to shareholders via CDA or RDTOH elections that integration kicks in.
3. It is true that the accumulated capital does accumulate faster than if someone saved outside of a corp, but then again, see point 2 on taxation and compared to a defined benefit (or employer contribution) plan, a corp is actually taxed more.
4. If you compare the PV of pension plan of government mid to high level exec, there is no way any of us in the business community could replicate this. Even with IPP and SERPs…the difference is the employer’s contribution…which ironically all of us are funding through these higher tax measures.
Umberto D: Capital budgeting necessitates saving capital for future investment in the business to progress in the company’s industry or to keep up with competition, be it machinery, buildings or information technology. Furthermore, contingency capital resource planning necessitates saving and preserving capital. For some industries research and experimental development capital is needed and accumulated. A dollar figure does fully measure the needs, just like materiality, different entities have different needs. Consequently a $10M entity has different capital budget needs versus a $500K or $50K entity. However,
both are small business concerns that benefit from capital budgeting and strategic capital resource planning. Possibly the tax return can ask if the invested cash is part of a capital budget or contingency plan.This would encourage small business to have a capital budget and have a view towards growth, job creation and innovation.
Jay G: The capital budgeting argument is extremely relevant for mid-market businesses. Kim D also shared this concern. A one size-fits all cap of $50,000 is not sufficient.
Jonah P: That’s great Jay. These changes will be a compliance nightmare. We don’t need any more impractical rules like SCI, WIP, changes to 55(2), etc. We all know they are after the tax deferral…this is just terrible policy though. Tinkering with the rates would have been easier. Today and Monday’s announcement will motivate businesses to stay small. A cap on passive income will lead to tax motivated investment decision making like someone else mentioned. What about real estate and the
impact to the market?
Administration on new policies if implemented
Jon M: Scale-able to size of business based on assets, employees, other criteria? It will be an accounting nightmare to keep track of different pools of capital sources. CRA will not be able to administer it effectively & efficiently.
Leigh A: I’ve heard this comment by many accountants and tax advisors, i.e., the tracking. Seems as if that part hasn’t been thought out so how can something like this be implemented?
Lorena B:I was also going to mention the complexity of tracking 3 new pools of investment income and higher fees incurred by clients. I don’t understand how they will be reducing the “red tape” for business owners with these proposals, as they claim. In addition, what does the $50K limit of investment income mean? Does this apply to one year only and it can accumulate each year like the TFSA? What happens when the investments grow over time? The limit still remains at $50K? This doesn’t make any sense. Also, what kind of analysis have they done in 2 weeks post Oct 2, 2017 to arrive at a $1M savings cushion which may be needed for future business needs/downturns/expansion/etc and how can this limit possibly apply across all industries in the business? Some may need significantly more capital than others in the future. Again, how are these proposals with respect to passive investments supportable? Thank you for doing a great job and standing up for Canadians.
My comment submitted to the group: I believe all been said enough by all professionals, please advise the government that the time, the cost that has been spent for this proposal by the entire society, is it worth?
In less than 5 minutes, I got 3 Likes. ^-*
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