Your department has created a plan that is the death of tax planning for entrepreneurs. Rather than commenting on the details, we wish to provide our view of the bigger picture. Please reflect on the importance of entrepreneurs and don’t equate the entrepreneur’s tax regime with the significantly different landscape of an employee.
I am writing on behalf of my partners at Rosenswig McRae Thorpe Chartered Professional Accountants. Formed in 1980, we are a respected accounting firm with 4 partners, 25 employees and more than 200 clients-most of whom are entrepreneurs. Our clients represent a diverse group of entrepreneurs who have taken risks to grow and expand their businesses. A number of our clients have been cited on lists recognizing top entrepreneurs in Canada.
These clients will be impacted negatively in a significant way if you proceed with your current plan-and in my conversations, many have indicated a high level of anger and frustration. I estimate that these clients alone employ more than 3,000 Canadians. In addition to personal and corporate income tax, they have contributed more than $75 million in payroll taxes over the past five years.
We believe that a complete rethinking of your department’s policy direction is needed. Your big picture objective of eliminating all tax advantages that currently accrue to entrepreneurs is simply wrong and will result in serious damage to the small business and entrepreneurial community in this country.
Your plan states that the government’s intention is to “help businesses grow, create jobs and support communities.” However, the result of the plan will be to eliminate virtually all broad based tax-planning strategies for entrepreneurs while creating outrageously high tax rates for estates.
We think that the current tax system-while not perfect-has worked well for Canadians and has helped create a thriving small business sector. We have many entrepreneurial clients who have left the comfort of secure jobs with fixed salaries and less risk in exchange for the risks and returns available to entrepreneurs. We know that many of these individuals have been prepared to take entrepreneurial risk in exchange for the opportunity to win financially and to gain tax benefits that are not available to those who don’t take such risks.
Given the importance of entrepreneurs to Canadian society, we were deeply dismayed and disappointed by your comparison of entrepreneurs to employees. The suggestion that the changes you are proposing create a “fairer” tax system and that you are closing loopholes discounts the realities facing entrepreneurs. Although entrepreneurs enjoy some benefits, they also face significant costs and downsides not shared by employees. Among these:
1. Contribution to government programs
Employers fund 50% of CPP, 60% of Employment Insurance and 100% of Ontario’s health tax. These contributions are made irrespective of the profitability of a company. For many employers, the cost of these plans exceeds the profits of their companies. This is a significant additional form of taxation that is borne by employers.
2. Administration of tax collection
Entrepreneurs establish and administer the collection of various government taxes at their own expense. The cost of this administration is not insignificant for small business owners.
Most importantly, entrepreneurs take risk with uncertain returns-and these risks are what create opportunities for both the entrepreneurs and their employees. In many cases those risks include taking on personal debt or contributing their after-tax dollars to support their businesses. In all cases they involve relinquishing the security of paid statutory and other holidays, benefits and fixed hours. That risk-taking spirit is what drives our economy.
4. Payment of tax prior to receipt of cash
In general, employees pay tax when they receive their pay cheques; however, employers are responsible for paying tax based on accrual accounting. As a result, most corporations are paying tax well before they have received the associated revenue.
Over the last decade, the tax benefits of corporate structures have already been tightened to reduce the advantages available to entrepreneurs. Among the significant changes:
(a) The introduction of a higher tax rate on dividends that come from income taxed at favourable small business tax rates. This has significantly reduced the benefit of the small business deduction; and
(b) The elimination of the ability for professionals to defer taxation of revenue not yet invoiced.
The proposed legislation discourages risk taking and entrepreneurship. It appears to be drafted from the perspective of employees who resent perceived advantages for entrepreneurs. Those employees, however, take advantage of government pensions, employer paid benefits, CPP, EI, EHT and other benefits. A wiser approach would recognize that those who create employment and opportunity should be incented and also treated with respect.
Creating a tax system that rewards entrepreneurs with some deferral and income-splitting opportunities was smart economic policy. Your government and previous governments have already restricted these policies in significant ways. Calling these benefits loopholes is a mistake and ignores the reality that entrepreneurs contribute and take risks in a materially different way than employees. That willingness to take risk and create jobs should be rewarded so that we have a better future in Canada.
If your intention is to treat entrepreneurs identically to employees, then we think you should also address the numerous costs of entrepreneurship noted in this letter. As just one example, shouldn’t the entrepreneur have payroll taxes treated as credits against tax payable?
You may think that tweaking the tax system to take more dollars from entrepreneurs will help you meet your overall objectives. But in fact targeting Canadian entrepreneurs by eliminating virtually all their tax benefits will be a terrible mistake for our economy and our country.
Yours very truly,
ROSENSWIG McRAE THORPE LLP
Jeff McRae, CPA,CA