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Smith Valeriote Lawyers Blog | Smith Valeriote LLP Law Firm Guelph

Proposed Changes to Tax Laws May Be a Problem for Business Owners & Professionals

Proposed Tax Law Changes in Ontario

Our law firm represents hundreds of private manufacturing, retailing, professional  and development companies – all of whom are guided by hardworking owner-managers who contribute to the Canadian economy. The proposed tax changes tabled recently by the government – whether it’s one, two or all three of the changes that are implemented – will vastly affect the economic landscape for private companies in Ontario, and Canada wide. The proposals are three pronged:

Income Splitting Revisited

The Minister has proposed that any dividends or salaries paid to spouses or children (regardless of their age) will be subject to a reasonableness provision. Any income distributed in excess of this reasonable amount will be taxed at the highest marginal personal tax rate and in particular the government has targeted dividends to children between the ages of 18 and 25 – precisely the time when these dividends are required by such children.

Lifetime Capital Gains Exemption

No longer will small business owners be able to multiply the capital gains exemption among  related corporations or Family Trusts. This will be a huge disincentive to building up value in a company, if in fact there is no protection from excessive tax upon a sale.

Passive Investment Rule

The Minister has proposed that income invested in passive assets such as stocks, bonds, GIC’s, and importantly, real estate, will now be subject to a rate equal to the highest personal tax rate. There will be no advantage to investing within a corporation. This is a significant change that would cause a great difference in the ability for anyone with a small business corporation – whether a manufacturer, professional, retailer or otherwise – to save  money within the corporation for future business expansion and the hiring of employees that goes along with same, acquisitions of product, machinery or even other business, and\or retirement.

Can you do something? Yes, you can.

The Minister is seeking input regarding the proposals until October 2. If all of these changes are implemented, the effect will be a large disincentive to investment in Canada and in small business generally. The economies of Guelph, Kitchener, Waterloo, Fergus, and Cambridge are all based on private companies.  As a law firm that acts for many entrepreneurs and manufacturers in southern Ontario who use the private company business model, we believe it is important that our clients make their MPs aware as to how this will affect their ridings. We cannot rely on our professional advisors alone, as some are unable to respond due to conflicts with their consulting contracts with the governments. Any private company owners who read this should be writing to Mr. Morneau, and to your local MPs.

Other references:

1. Article from Financial Post:  http://business.financialpost.com/opinion/kim-moody-and-kenneth-keung-proposed-tax-rules-like-class-warfare-against-private-businesses/wcm/5f1f2760-6494-4c00-bd5c-30364554e777

2. BDO Chartered Accountants has published an article and you may request or obtain a copy at BDO Canada and\or search BDO The Tax Factor 2017.

3.  RLB Chartered Accountants has published an article and you may request or obtain a copy at RLB.ca

4. Sample email sent by Frank Valeriote to certain MPs:

Hello <<>>

I act for many “middle class” professionals and am one myself.  While this may appear self-serving I speak for so many people that our law firm represents and that includes not only professionals but many small business private company owners that are prevalent in this area. 

I cannot begin to tell you how many calls I am getting as a former MP telling me ‘we’ have lost their support. These are people I know well, as well as clients for whom I and other lawyers in the firm act.

For a large majority of them the use of holding or professional companies for passive income generation and savings represents their pensions.  This act by our Government is therefore viewed as an attack on their pension savings. Imagine how seniors would respond. Remember the response to changing the age of eligibility to the OAS from 65 to 67. Well, you’re getting the same response from the owners of small companies and professionals. Our Minister of Finance is going too far and hurting the very people who, yes while earning a reasonable income and able to save, are also the job creators and economic engines that keep our economy moving using their small businesses.

When I was there I read and heard so much about the vast numbers who were not prepared for retirement and how much the government needed to encourage people to save. This is seen as a punishment to the very people who will not rely on government income as they enter retirement.

Enough said. You get the picture I’m sure. I do hope you folks reconsider this and the impact it is having on so many who have frankly supported me and you and so many of us in the past and now face the erosion of their pensions without warning. 

5. Sample email send by Dan Kennedy of Worldsource Financial Management /Cremasco Financial Inc. & Cremasco Partners Inc to his local MP (reproduced with permission):

 

Subject: "Creating a level playing field" Morneau's false premise


 Dear Ms. Chagger,

I am regretfully writing to you in response to the current discussion paper put out by Finance Minister Morneau.

As a business owner with many business owner clients who collectively employee hundreds of employees I cannot fathom the short sighted, anti business slant of these proposals. Mr Morneau grew up in a household where his father was brave enough to take risks that ultimately created an amazing business and provided for a wonderful lifestyle for his family. Perhaps being second generation he did not pay attention to the risk, stress and long hours that were required to create that business.  The statistics for success of second generation businesses are extremely poor and even worse when you get to the third generation. The understanding / acknowledgement of what it takes to achieve success can sometimes be taken for granted or forgotten. If the Minister of Finance and indeed the Prime Minister feel guilty about the silver spoons they were lucky enough to be born with and believe that privilege was not earned and are determined to be the ones to swing the pendulum back them they truly are the "misguided next gen" discussed ad nauseam

Entrepreneurs are taking risks everyday and numerous paycheques and families depend on them. They do not have big defined benefit pension plans like members of parliament. The  money in their business or holding companies is hopefully there for retirement but may be used if the business goes sideways, needs to expand to compete, buy new equipment and your government believes that to be an "unfair" advantage for business owners. I could not disagree more. IF that money ever does make it to retirement for the entrepreneur it can ONLY be utilized by taking it out and paying tax. AND if it has been able to accumulate to a to a larger amount then if it where taxed to the individual it will create greater tax as it is drawn out. The employee is protected from working 60+ hour weeks, from not getting a paycheque, from having to mortgage their house in pursuit of a dream, from having to worry about not only their family but the families of all the people they employee...and yet some people decide not to be employees but business owners.

As Minister for Small Business I do not have to explain the importance of small business in the Canadian economy. I believe that your role is to fight for small business and by extrapolation I need to believe you already are! I would want to believe that you, more vigorously than anyone in cabinet are trying to explain the absolute folly of exploiting the entrepreneur, small business owner, and professional that has been successful - against the odds. With that success the business owner creates jobs and employs Canadians...Your government in turn is now suggesting that all of the planning the business owner has done for the benefit of their own family who have endured the lean business years should be completely negated by a single piece of misguided legislation!! The government needs more tax money so the key planning tools that you implemented, you are wiping out and business owners need to just pay more tax for the privilege of being successful and we the governing Liberals do not give a damn about what it took to be successful!

The much talked about Canadian demeanor of simply accepting things should not be counted on here. These are individuals that are used to bucking a system, having to do what others will not and because of that I believe these measures will ultimately reduce overall tax revenue. Perhaps a quick short term bump but my clients are talking about significant anti growth responses.   

It would appear you are taking your lead from or at least joining in step with the Liberal Premier of Ontario that believes winning the vote of the unions and the pro union person is worth the expense of not having a province where businesses can actually exist. I segue to Ontario and even site the open letter from Magna to the Premier speaking to Ontario being an increasing hostile environment for business because your proposed draft legislation is having me hear the same response from business owners talking about Canada. Up to and including a number talking about 1. NEVER voting Liberal again (categorically!) 2. physically leaving Canada and the hostile tax system with their families 3. reducing their practice or business which would mean fewer employees. I would like to site the adage 'that to give a person a fish they eat for a day, teach them to fish and they eat for a lifetime'. Your measures take aim the people that have taken on the burden of providing fish for millions of Canadians. Attacking the few that have achieved some level of success ie. "only 50,000 families" may seem well played from a voting perspective but you are dealing with all the clients, customers, suppliers, advisors and employees of those professionals and small business owners. IF the dream of working hard and being willing to risk everything for an idea is not the Canada your party is looking to encourage or build then clearly the proposed legislation hits the mark. 

Family trusts that sprinkle income to spouses and children are now seen as "unfair". I would argue that a parent or parents working 50-60 hours or more a week at a small business has the spouse and the children paying a very high price. To suggest that "cost" does not warrant a monetary value shows a complete lack of consideration for what price the family pays for the successful venture.

I wish to believe that it was a rushed, poorly conceived document that does NOT represent you, your Ministry, your party or your view of Canada. To be the Canada that accepts refugees and stands tall internationally we must have a strong economy and that means a strong thriving small business sector which is your mandate as the Minister of Small Business. That would NOT entail attacking the planning tools utilized by those individuals who propagate said businesses under some misguided view of "fairness". 

Planning tools utilized by individuals under the direction of their advisors within the scope of the tax rules (ie the CDA account) are what captures some degree of "fairness" for the sacrifice and risk undertaken  by your constituent business owners and professionals. These individuals should be championed by your Ministry not be allowed to be ridden roughshod over.

I respectfully ask that you in your capacity as my MP ( I reside in Waterloo) and  Minister for Small Business take a hard look at this discussion paper and see it for the anti-business,anti professional position it represents. Appreciating the need to enhance revenue at the federal tax level it CANNOT be at the expense of the entrepeneurs that are the engines of the economy or the professionals that have chosen to make Canada their home. Now is the time to grow, to take advantage of the questionable policies south of our border, to be known as a mecca for creativity, entrepreneurship and new business! Now is not the time to be initiating business stifling policies or 'brain drain' encouraging taxation.

I look forward to both your response and your efforts on behalf of small business and the millions of families it supports!!

6. Please see example emails from Dennis Zinger, of Collins Barrow accountants.

The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.

Author:
Diane Squires

Date:
2017.08.22

Services:
Business Law

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Guelph Office

105 Silvercreek Pkwy. N.
Suite 100 Guelph, ON N1H 6S4

Phone: 519 837 2100
Fax: 519 837 1617

Toll Free: 1 800 746 0685

Email: guelphinfo@smithvaleriote.com

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Fergus Office

265 Bridge Street
Fergus, ON N1M 1T7

Phone: 519 843 1960
Fax: 519 843 6888

Toll Free: 1 800 746 0685

Email: fergusinfo@smithvaleriote.com