Passive Rule Changes and the Upcoming Budget
JANUARY 19, 2018
After speaking with six Liberal MPs over the past couple of months, RMT had the opportunity to reach out to Deputy Director of Tax Policy Elliot Hughes regarding passive rule changes and the upcoming budget. See the letter summarizing our positions moving forward below, and feel free to reach out to us by clicking here.
Mr. Elliot Hughes
Depute Director of Tax Policy
Office of the Minister of Finance
Dear Mr. Hughes,
Re: Follow Up Request from Constituent Regarding Small Business Tax Changes
It was a pleasure speaking with you last month with Howard Brown.
As a constituent of Minister Morneau, I want to thank you for taking the time to hear our perspective on the small business tax changes.
My colleagues Michelle Koscec and Tony Rosso and I appreciated meeting with six Liberal MPs over the past couple of months. We met with MPs Rob Oliphant, Francesco Sorbara, Marco Mendecino, Julie Dzerowicz, Paul Lefevre and James Maloney to discuss the tax changes. We heard their support for entrepreneurs and an understanding of the issues with the government's proposals.
As we approach the 2018 budget announcement, this may be our final chance to have our voice heard.
We would appreciate your efforts to ensure the final change to the taxation of passive income promotes entrepreneurship.
Summary of where we are
1. In July, the government proposed changes to all of the key cornerstones of entrepreneurial tax planning with the objective of eliminating all tax benefits that successful entrepreneurs have over employees.
2. In October, the government dropped the capital gains issue realizing that it needs some more time to think the implications through carefully. This issue is one that warrants Finance's attention and there are loopholes that a very small number of entrepreneurs use that should be closed.
3. The government introduced legislation effective January 1, 2018 to eliminate most income sprinkling. A carve out was made to allow spouses over age 65 to continue to benefit from sprinkling.
We are awaiting the government's decision on passive rule changes. These are rules designed to force successful entrepreneurs to pay out any profits not required in the business and pay immediate 53% tax consistent with an employee earning in excess of $225,000. If the entrepreneur does not do that the investment income will be taxed at roughly 70%.
Entrepreneurs deserve to be treated differently than employees for two central reasons:
1. As entrepreneurs they face tax burdens that employees do not face.
We walked you through an illustration of one of our clients who has paid millions in corporate tax, CPP, EI, Workers Comp, EHT and other tax costs before being able to take any money out of the company. It should be evident that an entrepreneur's tax situation has significant disadvantages as well as some advantages.
2. Entrepreneurship should be encouraged.
If entrepreneurship is not encouraged, then the result will be that some of our entrepreneurs will go to jurisdictions that have more favourable treatment for successful entrepreneurs. It is the best entrepreneurs who are the most mobile and compete most on the world stage. We need to retain those stars.
How you can help
We need your voice to make the above points to Minister Morneau as it appears he is determined to move forward with destroying all the benefits that entrepreneurs currently have.
A compromise could be reached - but it must be a compromise that doesn't put the star entrepreneurs in the same position as the T4 employee.
The government is proclaiming that only a small percentage of entrepreneurs are affected but that misses the key point. Even if only 20,000 entrepreneurs are impacted my belief is that among those 20,000 are many of the most important entrepreneurs.
Paul Lefebvre offered an excellent compromise. He suggested that once an entrepreneur had built a certain level of capital then he would no longer access the small business rate. At that point his deferral opportunity would fall from 38% to 26% eliminating one third of the deferral opportunity.
Other compromises are also possible - although frankly they seem unnecessary.
We have tax integration in Canada - and giving entrepreneurs the advantage of deferral of some tax is a reasonable ay to meet the objectives described above.
The combination of eliminating most income sprinkling and eliminating the small business deduction for successful entrepreneurs would have seemed like a huge downside for entrepreneurs a year ago. Now I view it as a compromise that should allow the Finance department to feel pleased that it has met its objective.
Please do what you can and let us know if we can be of assistance in any way.
Yours very truly,
ROSENSWIG McRAE THORPE LLP
Jeff McRae, C. Dir, CPA, CA
Hon. Bill Morneau MP, Minister of Finance
Rob Oliphant MP (Don Valley West)
Francesco Sorbara MP (Vaughan)
Marco Mendicino MP (Eglinton-Lawrence)
Julie Dzerowicz MP (Davenport)
Paul Lefebvre MP (Sudbury)
James Maloney MP (Etobicoke-Lakeshore)
Rt. Hon. Justin Trudeau MP, Prime Minister
Carol Wilding, President and CEO, Chartered Professional Accountants Ontario
Howard Brown, President Brown & Cohen Communications & Public Affairs Inc.
Michelle Koscec, Partner, Rosenswig McRae Thorpe LLP
Tony Rosso, Partner, Rosenswig McRae Thorpe LLP