Why budget was "unmitigated disaster" for small businesses

Government watered down tax changes to passive income investment but advisor says plans will only accelerate exodus of capital from country

Why budget was "unmitigated disaster" for small businesses

The Federal government’s 2018 budget has been branded an “unmitigated disaster” for small businesses.

Finance Minister Bill Morneau scaled back initial changes to the tax rules on passive investment income yesterday, moving to gradually eliminate the amount eligible for the small business tax rate, which is being lowered to 9%, after passive income rises above $50,000. The amount eligible is completely eliminated once passive income goes above $150,000 and will instead be taxed at the corporate rate.

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The changes will come into effect with the tax year beginning 2019 and Morneau said he expects the new rules to swell government coffers by $925 million by the end of the 2022-23 fiscal year.

The clarification from Ottawa was, in some quarters, welcomed as simpler and an upgrade on Morneau’s initial plans, which created a small business revolt last year.

However, Arthur Salzer, CEO and CIO of Northland Wealth Management, said the policy will drive capital out of Canada.

He said: “Given the fact that Canadian small family businesses create 70% of all new jobs across Canada, and provide extensive amounts of money to charities and not-for profits, to come in and first tax small businesses with minimum wage increases and then to add this on top, it makes Canada a very unattractive place to do business.

“From people I’ve already spoken to, accountants especially, who are dealing with families and businesses, there is already an exodus of capital, both human and financial, leaving Canada because of it.”

Salzer said the government wants to create a division between those who create businesses and those who don’t, pointing out that those taking entrepreneurial risks in order to create jobs are being unfairly treated when compared to government employees like, for instance, teachers, who enjoy protected pensions.

He said: “They want to create divisions across Canada, have people play the victim and say other people are doing better and that’s not right so let’s steal it from them, let’s take it away by force, and that’s not the way to do it.

“You see what’s going on south of the border and you have a politician who isn’t as polished as our prime minister, but there’s job growth and there is lower unemployment. Regardless of what you think about the man and the message, Americans are getting better off, even at the low end, versus Canadians, who are getting fired. A lot of business won’t be hiring people because they won’t have any money.”

Salzer also criticized the budget for its inertia when faced with the competition of US corporate tax cuts.

He said: “Businesses are leaving. Canadians for the first time are saying how do I get my capital out of Canada.”

He added that many of the larger players have already moved a lot of their operations south to lower wage and tax jurisdictions. “Now you are going to have the next round of people that have business that do $2, $3, $5, $10 million a year of revenue. And they are going to leave and not come back.”

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