The federal government recently launched a consultation on its proposed tax reforms for small and medium-sized enterprises. Given the importance of this topic for small businesses across the country, the Insurance Brokers Association of Canada (IBAC), on behalf of the RCCAQ and the other member associations, submitted a position paper to the federal finance minister setting out its positions.
The position paper raises two main concerns: 1) doing away with the distinction between business and personal income in small private companies; and 2) the importance of maintaining incentives enabling companies to carry out family-based succession plans.
Doing away with the distinction between company and personal savings
In its position paper, the IBAC states that it is essential for insurance brokers to be able to keep adequate reserve funds within their firm, either to grow, to invest if necessary or to get through hard economic times (e.g. 2008-09).
However, in light of the proposed reforms, reserves/savings kept within a small business (as opposed to amounts paid to the owner) would be taxed in such a way that it would not be advantageous to keep them within the firm. The government's proposed changes would inevitably encourage owners to take money out of their company and invest it in other places. Consequently, these companies would no longer have adequate reserves on hand, which are often used to leverage growth and ensure long-term viability.
The government's intention with the proposed measure is to ensure that small entrepreneurs pay the same tax rate as individuals. According to the government, it is unfair that small business owners can take advantage of certain rules enabling them to reduce their tax payable. But the extremely negative consequences of this proposal could outweigh any potential benefits.
The IBAC also questions whether the Canada Revenue Agency actually wants to discourage small businesses from keeping reserves on hand seeing as larger listed corporations face no such constraints. Small business owners do not regard their company's reserves as their personal funds, provided that these reserves are kept within the company. And small businesses maintain reserves for the same reasons that larger corporations do, i.e. protecting employees by maintaining their jobs in tough economic times. Having reserves on hand also enables small businesses to take advantage of business opportunities when they arise and to make major capital investments.
The IBAC has voiced concerns about the potential impact of these changes on entrepreneurs getting ready to retire or hoping to gradually reduce their working hours. Having adequate reserves on hand is a sign of prudence because it is usually difficult for business owners to precisely plan what form their retirement will take or when in fact they will retire. Doing away with savings incentives within small businesses will radically limit owners' ability to draw up succession plans.
The importance of tax incentives for family-based successions
According to the IBAC, one of the key goals of Canadian tax policy should be to help family-owned businesses by making it easier to pass the leadership/ownership torch to the next generation. However, under the proposed changes, shareholders would no longer be allowed to treat amounts taken out the company as capital gains in such situations; instead, any transferred amounts would be treated as taxable dividends. Consequently, children who take over ownership from their parents would face higher after-tax financing costs when buying back shares from related persons. Even more illogically, it would be more expensive for the children to buy a family business than it would be for a total stranger!
IBAC's position paper also notes that putting family businesses in jeopardy is not in the public interest. The proposed changes appear to be so far-reaching that they could adversely impact family succession planning, with nothing gained in return. One effect would be to jeopardize the long-term viability of small family-owned businesses—one of the main pillars of Canada's economy.
Summary
To recap, on behalf of the provincial associations and all the individual brokers they represent, IBAC maintains that the government's proposed changes would hamper the growth of brokerage firms and the investments they make. Over time, the employment rate in smaller communities would also decline. Furthermore, the proposed changes would make it harder to transfer a small business from one generation to the next.
Consequently, IBAC strongly advises the federal government to reconsider these risks and to take all the time it needs to carry out an in-depth evaluation of the adverse consequences of the proposed changes.
