1. Business owners don’t have an advantage.
My point last week was that a business owner who saves for retirement through his or her corporation is actually worse off over the long run because of the level of tax paid annually on investment income inside the corporation – even under the current rules. Under the proposed changes, things get even worse for the business owner.
2. Business owners are behind in saving for the future.
The Liberals will stick to their script: The proposed changes around the taxation of passive income in corporations will affect so few business owners that no one should take offence, they will say. The changes will only impact those with more than about $1-million invested inside their corporations. What does this tell us about business owners? That they are way behind in saving for retirement. If these folks were saving what they should to secure their futures (it takes much more than $1-million to provide a standard of living in retirement that middle-class Canadians have become accustomed to), the proposed changes would affect many more business owners – not a small percentage. The fact that the proposed changes will affect a smaller number of Canadians should be a real concern to the Liberals. Setting the bar so low at $1-million means most business owners will be affected if they are saving appropriately. So, how exactly will these proposed changes encourage business owners to save more and create greater financial security? They won’t.
3. Using registered plans is not an option for many.
“Hold on,” you say. These business owners have every opportunity to use registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), so it’s nonsense that they will be hurt by restrictions on building savings in their corporations. This view ignores the fact that business owners very often require earnings to remain in the corporation to: build cash for future growth of the business; improve the balance sheet to meet financing requirements (RRSPs cannot be used as collateral); provide security for the company during economic downturns, maternity leaves or disabilities, fund taxes for intergenerational transfers; or to buy other businesses and diversify corporate holdings. Whatever is left after these uses can provide taxable income for retirement.
4. Long-term planning will be thrown into disarray.
Thousands upon thousands have been saving for the future through their corporations. I know many who have figured out how much to save for the future based on reasonable assumptions about earnings and taxes. If the rate of tax increases so significantly, many will suddenly find themselves significantly short of where they should be by now to provide a secure financial future.
5. The costs of compliance will skyrocket.
If the Liberals plan to grandfather certain investment assets so that they won’t be subject to the new higher tax regime, this will create a burden on the business owner to track “buckets” of investments that will be subject to different rates of tax. What a nightmare this is going to be. The reality is that these different “buckets” are likely to be invested in the same investment account. How will the income be separated into differently taxed buckets?
6. It’s a burden on Canadian business owners only.
The proposed measures around passive income will apply only to Canadian-controlled private corporations. What about public companies? Or foreign-controlled private companies? It hardly seems fair to put Canada’s private business owners at a disadvantage here. If revisions are made to affect public and foreign private corporations, how will the changes impact foreign investment in Canada? The issue gets a lot more complicated – and political – than even the Liberals were expecting.
It’s time to scrap the proposals and take more time to study the issues. Rushing into changes is a recipe for unpredictable disaster, particularly given the more favourable tax environment that is shaping up south of the border.