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Conversations Open letter to Bill Morneau regarding tax proposals
October 6, 2017

Open letter to Bill Morneau regarding tax proposals

Dear Mr. Morneau,

I am writing in connection with your recent tax proposals concerning private corporations.

We are a small CPA firm and we have discussed your proposal with our affected clients and obtained their feedback to it. I must say, that the majority of our clients are not among the richest 1% which are referred to in the first sentence of your letter accompanying the proposals.

Rather, they are every-day, hard-working owners of small to medium size businesses (SMB) who earn modest incomes in relation to the business risks they must take daily. In many cases they might earn more as employees but they tilt in favour of self-determination provided the environment is “right”. This is what worries me. The environment is becoming challenged.

In business parlance, an increase in risk will not be assumed unless the expected return justifies such an increase. Of course, when the level of taxes is increased, it follows that the returns are reduced. An obvious result of this will be a reduction in investment which will lead to a reduction in employment. Multiplied over the small and medium business sector, employment is going to take a serious hit. This will not happen immediately but it will happen. How can it not? To every action there is an equal and opposite reaction. SMBs are recognized as the driver of employment and more importantly, employment growth. With this in mind, I’m not sure why your Government would choose to go to war with the SMB sector but the nature of your proposals are exactly that. I fear you will end up hurting those you most want to help, employees.

At a recent meeting with 12 CCPC CEO’s, I asked for a show of hands from those that have existing personal covenants to their banks or financiers. All raised their hands. I asked for a show of hands from those who had ever faced serious business adversity where the future of their company was threatened. Again all raised their hands. Your proposals, if implemented run the risk of alienating this group. These Mr. Morneau, are the entrepreneurs, innovators and small business leaders of our country and the very fabric from which our country is woven. Interestingly, the number of persons they collectively employed exceeded 500.

Mr. Morneau, for our country to grow and prosper not everyone can be an employee working for someone else. If we were all employees, we would all be working for the Government and you know what kind of system that is. Rather we need to encourage risk taking. Our economy is cyclical, there are good times and bad times. In addition, the competitive landscape is growing daily and from all corners of the globe. The SMB owner needs to navigate these times and must have a system that supports the accumulation of a reasonable buffer to sustain the organization through these downturns or periods of adjustment. Failing this companies that would otherwise survive a downturn will not. Your proposals do not give me any comfort that you are sensitive to this.

Further, many felt quite insulted that they were being portrayed as “tax cheats” when in fact, they are law-abiding business people complying with the ITA (Canada) as they are required to do. The provisions they relied on were not “loopholes” as they were characterized by your office publically or “unfair”. Rather they were put in place by previous Governments and have greatly contributed to Canada’s success and resilience. Sadly, if implemented your proposals will surely come up short. The following will happen, including:

  1. Fewer entrepreneurs will setup in Canada. In the global world of today, they will seek a more hospitable environment.
  2. Companies with the ability to direct income to other jurisdictions will do so. Tax revenue and employment will actually decline.
  3. Existing companies will be more reluctant to invest and grow given the higher tax environment and lack of confidence in Government policy around business. Employment and tax revenue will suffer.
  4. Companies will lack the resources to withstand future business challenges. More business failures are likely and layoffs will accompany that.
  5. Some existing businesses will see this as a reason to turn off the growth engine and begin to disinvest and wind down.
  6. With significantly more income going to the Government, disposable incomes will fall and the level of economic activity with it. History has shown that the private sector is a more efficient distributor of capital than the public sector.
  7. More business owners will require greater Government support during retirement owing to a restricted capacity to save during their operating years.
  8. The increased complexity of these proposals will make an already complex tax system even worse.

South of the border the tax reform debate continues and to their credit they have spent considerable time debating the various issues that are pertinent. Your proposals have a very short fuse indeed. It certainly looks like US tax rates will be heading lower rather than higher and the administration is focused on providing corporate America with more money to invest and grow. Why are we moving in precisely the opposite direction?

Mr. Morneau, in closing we need to recognize that companies are not the mythical golden goose from which you might pluck feathers at will. Rather they are part of an ecosystem that is much more delicate than you seem to recognize. In Ontario, an accelerated implementation schedule to amend the labour laws and minimum wage legislation, coupled with your tax proposals are going to make for a very difficult business environment. At the same time, interest rates are rising. You will see an increasing level of business failures and decline in employment. Thankfully, those employees who lose their jobs will be able to use the Employment Insurance system for support. Sadly, the small business owner who largely finances this system is not eligible participate. I urge you to rethink these proposed measures for the good of all of us.

 

Respectfully,

Michael Koff, CPA, CA

 

 

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