I love business and wealth generation. I love seeing businesses and entrepreneurs succeed too. Before entering politics, I was an entrepreneur. I made the choice to stop working full time for other people because I was excited for the freedom that owning my own business allowed. I enjoy seeing people do well and the fact that, in Canada, many people have the ability to start from modest backgrounds and work their way into a better life.
Since mid-July, I have heard from many Edmontonians, entrepreneurs and small business owners, all deeply concerned about changes to the tax system. First, and foremost, I want to apologize to each and every entrepreneur and small business owner in Edmonton Centre for the tone and the language that has been used in rolling out these proposals.
Small business is the backbone of the Canadian economy. This is even more true here in Alberta where we have such a high per capita number of small businesses. Anyone, including myself before politics, who has used some or all of these tax planning measures did so by following the rules – not by taking advantage of loopholes.
Many of you have asked for my take on these proposed measures. When I was elected, I promised politics in full sentences. The proposed changes are among the most technical and complex policy proposals our government has put forward. The important discussion that we are having is not served by talking points or misinformation on either side of the ledger.
Broadly, the government is considering changes to three rules under the tax code:
1) Removing the incentive to “income sprinkle”, which is a process where dividends are issued to the spouse and/or children of the owner, even if those family members did not invest in or otherwise contribute to the operations of the business.
2) Changes to prevent income that would normally be distributed as salary or dividends from being converted into capital gains through “multiplication strategies” by moving money through related, non-arms-length entities.
3) Proposals to increase taxes on passive income from investments held by a corporation then taken out for personal use.
These are significant proposals that thoughtful people can disagree with. I have heard many concerns and I am both sympathetic to and persuaded by many of them. To have constructive discussions regarding these proposals, we need to be accurate on what is actually being proposed and we need to be honest about the unintended consequences that may result.
First, it is simply not true that these proposals are locked in. I am not in politics to waste time and nor are my government colleagues wired that way. We are in the midst of a consultation and the feedback from that consultation will be used to amend and improve these proposals. On passive income, for example, readers can see that our government has put forward various options for changes.
Second, the taxation will be on a go forward basis. It will not affect funds that have already been saved or invested within a Canadian-Controlled Private Corporation. The government will not be taxing savings that entrepreneurs have been putting away in previous years.
Third, our government is not lowering the Lifetime Capital Gains Exemption. Farm owners will continue to receive a lifetime capital gains exemption of up to $1 million for farm property. When farmers sell business assets, they will continue to pay no tax on the associated capital gain up to the maximum amount of $1 million. For others, this exemption is just under $836,000.
The tax system is complex. It is several thousand pages long. This complexity has led our small business owners to require the professional advice of their accountants to navigate the various corners of the system. I am concerned that these changes, as proposed, could continue to complicate – rather than simplify – our tax system. We need to do everything possible to avoid unintended, harmful consequences for small business owners, the people they employ, and the families they support.
It is clear to me from listening to constituents that we have more work to do on any passive income measures. There must be serious consideration of the effects such a proposal would have on the active running of small business and on the retirement and other personal planning of small business owners. There is more study that needs to be done.
As it relates to the proposals touching on income sprinkling and the conversion of dividends to capital gains, I will continue to listen to feedback. However, I am convinced at this point that these proposals are in keeping with our government’s intention to create a more equitable and neutral tax system. I am not convinced that dividend tax credits, designed to encourage investment that will help businesses succeed, should be used as a tax planning strategy for a family. I am also pleased to see that our government’s proposed reasonableness tests will not prevent the issuing of dividends in cases where family members contribute, either financially or through their hard work, to the success of a business. I will also continue to press our government on its interest – as expressed in the July 18 proposals – in finding ways to ease the transfer of businesses to family members.
Our government was elected on a promise to consult more with Canadians and to listen. It is important to note that we are doing just that. As controversial as these proposals are, we chose to engage with Canadians on the ideas rather than acting unilaterally.
I also promised to bring more Edmonton to Ottawa. I have been listening to you throughout the summer on these issues and I brought your concerns to our national caucus meetings. I will continue to listen and I invite your comments and concerns as I continue to host roundtables during the consultation period to hear directly from you. Thank you to all of you who have already written, phoned, or met with me to share your stories, views, and concerns. I am proud to represent you in Ottawa.