The following letter was written by FL Fuller Landau’s Tax Partner Marlene Gilfix-Raich and sent to The National Post in response to recent articles on the proposed changes to the taxation of small businesses, professionals and other entrepreneurs.
To: The National Post
In rebuttal to Mr. Coyne’s article dated August 23, 2017, my points are as follows:
- The concept of a “buck is a buck” was discarded years ago, when the tax system was overhauled in the 1970s. Businesses have to deal with today’s reality and how the tax system really works.
- Our tax system was carefully designed to reward risk-takers by making the taxable portion of capital gains 50% and taxing dividends at a rate reflecting the underlying corporate tax already paid. Great thought went into the system, and it stood the test of time. For the last several years, Finance has ignored the fundamental logic of the system, greedily increasing personal and dividend tax rates willy-nilly. They have distorted the system and are reaping the results.
- The article reiterates the false equivalencies of the Department of Finance. For example, comparing the “income” of the salaried employee to that of a business, as if the concept is interchangeable. It is not. In the Canadian system, the employee’s income is basically cash received. The “income” of the business is determined under the accrual system, and may well be tied up in accounts receivable and inventory. Try feeding your children from accounts receivable. It is not a “buck” that any grocery store will take.
- The world is a competitive place and Canadians are highly mobile. When conditions in Canada are less favorable for risk-takers, history shows that our best and brightest move, particularly to the United States. The economic activity they would generate in Canada disappears with them. Hollowing out the entrepreneurial class reduces opportunity for all.
- There is no point in pretending that taxpayers will not be motivated by the tax system in which they function. The return on risk is a combination of factors, one of the most significant of which is the tax payable on the reward. Taxes ARE a “real economic cost”.
- The American tax system is highly favorable to entrepreneurship and wealth creation. Qualifying dividends and long-term capital gains bear rates of 20%. The top personal tax rate depends on the state of residence, but is still considerably lower than ours and is effective at a much higher income bracket. Small business has access to limited liability AND the low personal rates through a system where corporations can be transparencies for tax purposes. The Canada-US tax convention facilitates cross-border activity and accommodates the transparencies. In my view, ignoring the tax system of your most direct competitor is not a good idea if you wish to retain entrepreneurs on this side of the border.
- NAFTA will hardly matter if American-based companies fill the entrepreneurial niche that Finance seems determined on Canadians vacating. They will take advantage of the low corporate rates Finance is touting. They and other countries will reap the rewards of risk-taking and the buying power of accumulated wealth for their societies.
- Nowhere does either article by Mr. Coyne deal with the tone Finance has adopted in bringing forward their proposals for some years now. The Department of Finance always claims to be closing “loopholes” and remedying “unintended consequences”. Surely neither description can reasonably apply to strategies which have received their approval through years of rulings from Finance and their satellite tax department. Instead of admitting that their policies are changing, they sow the seeds of jealousy and resentment against the business community. Truly offensive is the latest attempt to demonize the wealthy and entrepreneurs who plan their affairs in a tax-efficient fashion by drawing a moral equivalence with those who hide their money off-shore. Finance tells Canadians that these latest proposals are required “in addition to our work on international tax evasion and avoidance, designed to stop the use of tax havens.” I wonder who would want to be an entrepreneur in Canada in such a poisonous atmosphere. Far safer to be the “good” employee.
- As usual, Finance calls for a consultation period, but having once again drawn the cloak of moral superiority over the latest proposals, they will doubtless proceed no matter what the concerns of the community, as this has been the pattern for some years on previous “consultations”. All taxpayers require certainty in the tax system. They need the predictability that years of precedent provide. Fundamental changes should not be made without a proper study, which includes the concerns of the stakeholders. Canadians desperately need a way for business, professional and community leaders to work with the government to get back to reality and out of the ivory towers of the Department of Finance.
Marlene Gilfix-Raich, Tax Services
FL Fuller Landau
Share your opinion
Until October 2, 2017, stakeholders—including the affected business communities, provincial and territorial governments, tax advisors, commentators and other Canadians concerned about the fairness of Canada’s income tax system—are encouraged to share their views and ideas about the proposals to address the tax planning strategies.