A new letter raises concerns about the tax proposals' retroactive element and 'bracket creep'
The Coalition for Small Business Tax Fairness, a coalition of 73 organizations representing business owners around Canada, has written to Finance Minister Bill Morneau asking further action on the government’s proposed tax changes affecting small-business owners.
“[W]hile budget measures addressed some of the concerns related to the complexity of earlier proposals on passive investments, the approach outlined in the 2018 budget will create an entirely new group of losers,” the group said in a statement.
Under the proposed rules starting in 2019, the small-business deduction would start to be withdrawn once a business owner earns more than $50,000 in passive investment income annually; they would lose access to the deduction totally once they exceed $150,000 per year.
“While the suggested approach is somewhat simpler than previous proposals, we feel it will unfairly penalize businesses that use passive investments in order to save for downturns, to buy property or for future investments in their business,” the group said. “We also believe the scope of the proposals will be broader than the federal government predicted.”
The coalition also expressed concern for business owners who have already built a significant pool of passive investments. Previous proposals indicated that existing passive investments would be “grandfathered,” but the current proposals would see such business owners lose their access to the small business rate for active business income.
“[T]here is a significant retroactive element to the new proposal as past decisions will have negative tax consequences in the future,” the coalition said. “We urge you not to penalize business owners for past passive investments that were legally accumulated over the past several decades.”
To prevent small businesses from being subject to “bracket creep” on the taxation of their passive income, the letter also called for the $50,000 to $150,000 exemption limits to be indexed to inflation.
It also said the small-business community remains “distressed by, and unprepared for” the new rules on income splitting, which according to a Parliamentary Budget Office report may result in a considerably higher potential tax increase to small-business families.
In consideration of this, the group asked that the application of new income-splitting rules be postponed until Jan. 21, 2019 at the very earliest. It also asked the government to consider exceptions which, at minimum, could include a full exemption for spousal income and dividends from the income-splitting rule changes.
“We urge the government to continue to find solutions that do not negatively affect the small-business community’s ability to grow and prosper,” the letter said.