Small business tax changes bad for Nunavummiut

by Michele LeTourneau- October 28, 2017

While the Baffin Regional Chamber of Commerce (BRCC) is busy collecting input from business owners in the region, the federal government – responding to public pressure – has scaled back some of its proposed tax reforms related to small businesses.

Victor Tootoo, seen here at the Nunavut Trade Show in September, will speak out against the federal government’s proposed changes to small-business taxation regime in a presentation to the Senate Finance Committee sometime in November. photo courtesy of Michel Albert

The federal government’s changes target income sprinkling, a practice that lets business owners split their income with other family members.

A second proposed change, which was partially walked back, seeks to limit passive business income taxation.

A third proposed change related to dividends and capital gains, and has apparently been dropped.

“My first reaction was sheer disappointment. I feel deceived,” said long-time Iqaluit business owner Stuart Kennedy, who throughout the years has been involved in five small-business corporations.

Referring to the Liberal Party campaigning on promises to the middle class in 2015, Kennedy said small businesses are a part of the middle-class demographic.

“Most small business operators are middle-class people, middle-class people who have gone out and taken risks and developed, in the face of the realities of CRA. You are not successful as a small business as a result of the Receiver General – you can be successful in spite of.”

The Government of Nunavut does not have statistics on how many small businesses operate in the territory, but Kennedy said there are 1.2 million small businesses in Canada as defined by number of employees being under 100.

“That is 60 per cent of the revenue received by Revenue Canada. Small businesses are the economic engine of Canada,” he said.

Shawn Lester, of chartered accounting firm Lester Landau, said the proposed changes “hurt a lot,” from a Nunavut perspective. Lester said the proposed changes hinge on the government’s use of the word “reasonable”, the definition of which would be at the discretion of the Canada Revenue Agency.

“We talk a lot about food insecurity – this all of a sudden becomes income and tax insecurity, all because of a definition of reasonableness,” Lester said.

“The proposed changes have the potential to negatively impact small business in Nunavut,” said Iqaluit Chamber of Commerce president Matthew Clark, “by making it harder to build up savings within the business that might be used for re-investment and job growth or for retirement.”

Senate committee will hear Nunavut’s concerns

These are the messages BRCC president Victor Tootoo intends to deliver to the Senate Finance Committee, which has invited him to speak to the proposed changes at one of its meetings sometime in November.

“The majority of business owners in Nunavut are middle class. They’re not wealthy,” said Tootoo, adding the federal government itself encourages incorporation, quoting from a government website.

“So many business owners in Nunavut – and Canada, as well – have structured their business affairs in such a manner as to use the benefits of incorporation. I don’t know why now we’re being portrayed as tax cheats by doing that.”

Lester says few of his clients have come to him expressing concern.

But as one chamber member said to Tootoo, “They say that it will only affect those making more than $150,000, which is possibly a more disproportionate group in Nunavut as our salaries, etc., are larger just to combat the cost of living.'”

Lester agrees.

“In effect, some of these policy changes could hurt Northerners just because they happen to make more income to live on,” he said.

Both Tootoo and Lester agree income sprinkling is often a necessity for Nunavummiut. With the shortage of daycare spaces – in Iqaluit for example, there are more than 700 children on wait lists, and the situation is often worse in smaller communities – a family may only have one person making an income. Tootoo was in that situation himself, he said.

“It wasn’t until (the child) was 17 months old that we got into a daycare, so that was a total 26 months wait for daycare. And the cost of daycare in Nunavut is prohibitive. When you want to start your own business, the amount of money you need to cover that cost is very high,” said Tootoo.

Some then opt out of daycare, with one spouse staying home.

“So without the ability to allocate income to other household members in Nunavut, many businesses would not survive.”

“But is that meeting their (CRA’s) definition of reasonable or not?” Lester asked. “Right now, depending on who the auditor is from CRA.”

Death of small business?

The passive income issue is also striking, as many business owners save inside their companies for retirement or other legitimate reasons.

“A lot of private businesses owners leave money in the company for business purposes but, ultimately, it is part of retirement scheme. Or they keep it when they’re younger and they pull it out when their kids are going off to university,” said Lester.

On Oct. 18, Morneau tweaked his proposed change to allow $50,000 of passive investment income annually to be sheltered before the higher tax rate is imposed.

Lester said this would appear to leave the middle class small business owner alone.

“One tax lawyer’s article that I read this morning (Oct. 19) stated that there is a shocking lack of detail in the proposals, leaving great uncertainty … which for Arctic small business is just another area of insecurity on top of all the other things we face daily,” he said.

Further, Tootoo says while the federal government’s intention may be to create a fair and representative tax system, in Nunavut the changes would not be fair and representative, as civil servants, which make up 25 per cent of the Nunavut population, enjoy benefits and pensions not enjoyed by small business owners.

Kennedy sees the federal government’s plans as the death knell for small business.

“I see the small business going the same way as the family farm concept over the last 50 to 60 years. It’s going to die out. It’s going to change the fabric of this country.”

Tootoo is currently working on his submission to the Senate Finance Committee, which he says will contain options for the proposed tax changes to make them fair and representative for Nunavummiut.

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