Article on Proposed tax changes and farms. Dalhousie university professor

[mcfarms]

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Until recently, two things were certain in life: death and taxes. We can now add a third one: botching the promotion of a tax reform for political gains. Finance Minister Bill Morneau’s tax reform has been a communications disaster.

Claims about Ottawa’s intentions to revamp our tax system for small corporations have been ridiculous. Some predict a recession due to the changes proposed, while others declare the end of entrepreneurship as we know it. We should all take a collective deep breath and figure out how changes will affect our economy.

What needs to be underscored, though, is how Morneau’s vision for taxing small corporations will impact our agrifood sector.

Generally, the tax system is not really about pensions, legacy and social programs. Yet for a family-owned business, it is — and there are thousands of them in agrifood. In farming, Canada now has more than 43,000 incorporated farms, compared to around 23,000 incorporated farms in 2001.

Proposed tax changes penalize families

Despite the fact that we have fewer farms overall today than in 2001, more of them have opted to convert their operations into a corporation to provide an incentive to the next generation to take over the farm.

Proposed changes on capital gains would make it more expensive for a current family member to acquire the farm than for a third party. This is a critical piece of a highly complicated puzzle: keeping families and jobs in rural Canada is not an easy task and many agricultural producers are using our tax system wisely to secure the future of their businesses.

In food processing, retailing and in the food service sector, countless family businesses are wondering how family values immeasurably embedded in anything the corporation does can survive the next generation.


Agriculture in Canada continues to decline. Handout/Statistics Canada
Income sprinkling is another issue Morneau is attempting to address. Presently, corporations can hire family members who work for the enterprise, which reduces the tax rate for everyone. Current rules about who can be compensated and at what level are ambiguous, at best. Morneau wants to change that, and for a good reason.

Several small corporations pay family members, who do not necessarily work for the company, to pay less taxes. This practice should stop but family businesses are really a different breed.

Defining tasks in a family-owned business can be difficult. Many of the contributions made by family members are ad hoc and not easily categorized. Recipes, tricks of the trade, family traditions all matter a great deal to whatever a small food outlet is doing. It is nothing like being an accountant, a doctor or a dentist.

A family business is like — well, a family. The enterprise survives daily by relying on favours and duties as assigned. On a family-owned farm, a restaurant or in a small food processor, job profiles are vague, at best.

Condescending, awful rhetoric

This political nightmare began in July when Ottawa launched a consultative process on how best to address tax planning practices that it believes are being used to gain unfair tax advantages. Individuals set up corporations to pay less in taxes in a variety of ways. Ottawa’s intentions are noble, but it is the bombastic tone used as a backdrop to promote the plan to Canadians that has been less than effective. Consultations end Oct. 2.

What has really caused many of the problems is the awful, condescending rhetoric coming out of Ottawa, labelling small business owners as a group of cheats and greedy tax evaders trying to dodge the system by using loopholes. That was simply insulting.

The government anticipates that the new regulations will bring in barely $250 million a year. For those thinking that the Liberals are looking for ways to increase revenues to pay for a ballooning deficit, they are wrong. This is really about politics, purely and simply.

Prime Minister Justin Trudeau’s egalitarian agenda to serve the so-called middle class is motivating the government to implement these changes. The tax regime needs change as some small corporations are using current tax rules to save money unjustifiably.

Most opponents have been quite vocal in recent weeks, but their corporations will survive the changes. However, the stakes are much higher in agrifood and farming.


Highlights of Statistics Canada’s 2016 Census of Agriculture. Handout/Statistics Canada
Agriculture, food sector at risk

This is not about being unwilling to pay more taxes. Rather, it is about the viability of an entire economic sector. Our tax regime should differentiate and give our rural economy and family corporations some level of immunity.

Ottawa should think of fiscal incentives the agrifood sector can use to grow. Right now, it is not clear how this can be achieved. As Ottawa is attempting to bring more fairness to our fiscal landscape and fix what is largely an urban issue, it shouldn’t penalize our agrifood sector.

Despite Morneau’s disgraceful performance as a tax reform salesman, changes will most likely happen, to the despair of many. Changes to our tax system are obscure concepts for most Canadians who have never had a company. Even Canadians with corporations would have a hard time understanding what is being proposed.

The confusion that has led to the hysteria we are seeing today is really the government’s fault and no one else’s. When it comes to taxes, painting everyone with same brush is unacceptable.

Ottawa will get its way in the end, but it should at the very least accommodate the unique intricacies of our agrifood sector.

Sylvain Charlebois
Professor in Food Distribution and Policy, Dalhousie University

[grassfarmer]

Oh yeah, that's him that hates supply management and dairy farmers - a real supporter of family farms.

[mcfarms]

HomeBlogs & CommentCanadians understand the proposed new tax rules—that’s why they’re mad

Canadians understand the proposed new tax rules—that’s why they’re mad
The problem with the federal goverment’s tax reform proposal isn’t that they’ve failed to explain it. People absolutely get it—which is why they’re protesting

Sep 26, 2017 Evelyn Jacks 0

paperwork
(Helloquence/Unsplash)

Canadians may not always get the tax math, but they do get tax fairness. That’s why the controversial proposals to dramatically change the taxation of private business in Canada are proving three things: tax literacy is alive and well in Canada, most people understand and value the incredible entrepreneurial spirit that drives the economic engine in this country, and the government thought these tax changes wouldn’t be a big deal. But they are. Here’s why:

We’re not comparing apples to apples
The government set out a theory that households earning similar levels of income should pay the same taxes. All things being equal, that seems fair. Unfortunately, all things are not equal when you compare the income attributes of the employed with the self-employed.

How Bill Morneau found himself at war with small business
For the owner of a small business to earn a “wage” similar to that of a non-owner employee, there is a prerequisite: he or she must first come up with capital, either borrowed or retained. If they don’t have it, they can’t pay themselves a wage and as a result, they also miss the opportunity to fund their CPP and RRSP contribution room. Non-owner employees don’t have to meet that burden, nor do they need to fund the employer’s share of CPP premiums for themselves or forfeit EI coverage. That makes the cost of earning the non-owner’s wage much lower. That’s a big deal.


Employees don’t have tax audit risk
The take-home pay of a non-owner employee is certain; that is, the government cannot come back years later and question the tax rate applied to it. However, the tax proposals on the table for private business owners introduce tremendous uncertainty, especially if you are a family member who works in the business. The proposed “reasonableness” tests on the labour and financial contributions by adult family members leave too much discretion with the CRA, who will be able to change the tax attributes on these earnings. That brings tremendous tax risk to the value of the after-tax income of a family working in the business, It also removes access to progressivity for those employees. That’s not comparable to the after-tax wage a non-related employee makes, and that’s a big deal.

Employees enjoy progressive tax rates on investment income
The government proposes to charge a flat, top rate, non-refundable tax on passive income earned when a small business corporation invests its retained earnings. It suggests that if business owners want to enjoy progressive tax rates on that investment income, including rental income, they should flow active earnings out of the corporation as a wage and invest their net wages personally.

But that’s a big deal: business owners need to have the discretion to save and invest retained earnings as they see fit, to meet the burdens of responsibility they bear for their employees and new demands to grow their businesses to meet an emerging future. Further, because the government proposes to require the business owner to track the source of the passive investment, under a system of mind-numbing complexity, the costly tax and bookkeeping expertise that will be required, is sure to wipe out any advantage of investing the lower taxed capital. But that’s not the full extent of the bad news.

Employees don’t pay taxes twice on investment income
The government is proposing to significantly distort the integration of the personal and corporate tax systems. Two provisions, a refundable dividend tax and a notional Capital Dividend Account will be eliminated on a go-forward basis in calculating tax on passive investments that result from the investment of low-taxed retained earnings. This will result in exorbitant combined personal/corporate tax rates on dividends and capital gains earned by individual business owners.

Further, proposed new rules on the sale of business assets, will make it more attractive to sell those assets to an unrelated third party rather than to family members. It also appears there will be a triple tax on capital gains when a business owner dies – once on the final individual return, then on the sale of the asset within the company and again on the distribution of dividends.

Employees, on the other hand, can invest their after-tax earnings in a much more attractive tax environment, especially on dividends earned from publicly traded companies. All of this is a very big deal, because the new tax reforms provide a disincentive to invest in a private business.

Capital is mobile
Unfortunately, the people who today have the intellectual and financial capital to invest in and grow the small businesses that provide employment for millions in Canada, also have the ability to move to tax friendly jurisdictions. The reforms before us have the potential to cause a brain drain of our highly educated, most innovative young citizens, and that means Canadians lose access to goods, services, jobs. When that happens the tax burden to fund all that we need, unfortunately, falls to the middle class. That’s a big deal.

Canadians are very tax compliant
Over 90% of Canadians—individuals and corporations—voluntarily comply with their complex tax system. They buy into progressivity—the more you make, the more you should pay—and they willingly file and pay their taxes, largely on time. They also take on the burden of proof for their tax declarations under our self-assessment system. They do so because they understand that in arranging their financial affairs within the framework of the law to pay the least taxes possible, they are exercising their rights as taxpayers to pay the correct amount of tax, but no more.

A law-abiding taxpayer cannot, therefore, be labelled a tax cheat a few years later, when a new government wants to change the law. That’s a big deal, because it makes our tax system uncertain, and Canadians are telling the government today that they aren’t good with that.

Evelyn Jacks is Founder and President of Knowledge Bureau, a national educational institute for the continuing professional development of tax and financial advisors and author of 52 books on the subject of tax preparation, planning and wealth management for Canadian families.

[Hamloc]

Oh yeah, that's him that hates supply management and dairy farmers - a real supporter of family farms.

Grassfarmer, interesting opinion piece in the Toronto Star by David Malach titled Suggestions for Trudeau's tax reforms(title not exact doing from memory). The Toronto Star is very Liberal friendly so it is possible you will consider this article less biased. Even the Liberal supporters feel Trudeau and Morneau have gone too far.