Five ways small business is taking a tax blow to the head

Wouldn’t it be better to encourage small business ownership than punish it?

David FullerChris clobbered me on the side of the head and then swam over me. Coughing and sputtering I came up for air and yelled foul.

The referee blew his whistle and Chris was sent off to the side of the pool. I laughed and played on. It was all part of the game of water polo Chris and I have been playing with each other for 30 years.

Canadian businesses, too, are getting clobbered on the side of the head as a result of federal tax changes. It’s no game, however, and definitely no laughing matter.

The truth is that, despite the lowering of the corporate tax rate in the next couple years from 10.5 to 9 per cent, small business owners will suffer from the proposed changes. Here are five examples of how business owners will get swamped.

  1. Income splitting: Instead of stopping income splitting, the government should be allowing it for all families. For many years when my wife stayed home to raise our kids or had a part-time job in family counselling, I would split my income from my business with her. Our income for some of those years was much less than average Canadian family income of $76,000. Splitting enabled our family to pay our bills, reduce our taxes, and to work the long hours needed to grow our businesses. This splitting may no longer be possible under the changes unless women who support their husbands in business actively participate in the business.
  2. Saving for retirement: The government has said it is going to tax money earned on investments by small businesses at a rate of up to 71 per cent. This means that when small business owners are trying to save for retirement, they will not be able to accumulate cash or invest money saved in investments that is not directly related to their operations. How does this make any sense? Small business owners across Canada do not have access to the substantial pension funds government workers or politicians or even workers in most large businesses have. These pensions worth $40,000 to $50,000 per year can add up to more than $1 million in savings that small business owners need to retire with the same level of comfort that people who never took any financial or business risks are entitled to. But if small business owners start working with the Finance minister’s family company, Morneau Shepell, they might just be able to put money away for their pensions like everybody else. Isn’t that a conflict of interest?
  3. Lack of tax fairness. Perhaps the biggest issue of the tax proposed on small business is the lack of focus on large multinational corporations, like banks, mining, manufacturing, and technology companies with offices in Canada but investments outside the country. Offshore investments, head offices in tax exempt countries, and the ability to pay limited taxes in Canada while taking advantage of the system are not accessible to small business owners. A lack of government willingness or capability to ensure these companies pay fair taxes hurts small business. It’s not that small business owners don’t want to pay their fair amount of taxes, it’s that when they see unfairness in the system that benefits the uber-rich yet penalizes small business owners, they get upset.
  4. The focus on privately owned corporations. Many small business owners are encouraged to incorporate to reduce their liability. Owning a limited company reduces some of the risks of running a sole proprietorship. The government focus on privately owned corporations may have been intended to increase tax revenues but overall the complex changes are just one more stressor that small business owners have to face in their day-to-day lives.
  5. CRA focus on employee discounts. The Canada Revenue Agency is going after employees of small businesses who receive company discounts. If I have a small retail store or restaurant and allow my staff to buy something from the business at a discounted price, the benefit is going to be taxable. Most employees of small businesses make much less than the bureaucrat who proposed this change. Small business owners with limited resources and limited income often don’t have much except staff discounts as perks to offer to employees. Taxing these discounts is going to place a complicated burden on small businesses owners who are just trying to be fair to their employees.

My neck is still sore from where Chris hit me in our game of water polo on Sunday night. If every Sunday night I got hurt when I went to play water polo, I would probably quit.

If the government keeps clobbering small business owners with changes that make working for government agencies so much more appealing than taking the risk of running a business, more of them are going to quit.

Wouldn’t it be better to encourage small business ownership than punish it?

Dave Fuller, MBA, is an award winning business coach and a partner in the firm Pivotleader Inc. Comments on business at this time? Email

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tax blow, small business, entrepreneurship

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