09.11.2017 08:31 AM

This week’s column: an open letter to Messrs. Trudeau and Morneau

Dear Messrs. Trudeau and Morneau:

So, small businesses.

Almost twelve years ago, I started one.  It was quite a thing.

Before that, I’d been special assistant to Jean Chretien on the Hill.  I’d been a partner at a Bay Street law firm.  I’d been a vice-president at a Vancouver ad agency.  I’d been a reporter at a couple newspapers.

All of those places couldn’t have been more different.  But they all had one thing in common: in every one of those places, I’d been working for someone else.

My bosses (that Chretien guy in particular) were mostly terrific.  They were good to me.

But I wanted to go out on my own.  I wanted to see if I could take what I’d learned – as a journalist and working for Chretien, in particular – and do something that was different than what everyone else was doing.  A war room for hire: that’s what I wanted to do.

So, I did.  Developed a business plan, lined up as many clients as I could, hired a few young people, found some space, and got a loan to cover payroll until we got on our feet.  Called it the Daisy Group, after the famous ad from the 1964 presidential campaign.  (Long story.)

And let me tell you: there is nothing quite like laying awake at night, wondering if you have made the biggest mistake of your life, wondering if you have put your four kids in jeopardy by starting up a small business.  And then, there’s nothing like that first morning, either – for us, May 1, 2006 – when you open the doors for the first time, and a client (in our case, Nike) walks in.

Anyway – we made it work.  We made it into a success.  I owe it to some amazing clients, and to some amazing young people who worked for me, and with me.  I learned from them, and I hoped they learned something from me.

And we’re still here.  Still have clients, still have amazing young people working with us.  It’s corny, but I am pretty proud of that.  I’m proud that I made something, and then made it better with the help of others. (My wife Lisa, in particular.  But that’s a long story, too.)

I’m not going to lecture you, fellas, about why your changes to the rules governing small businesses are an unmitigated disaster.  You’ve already gotten an earful from Liberal MPs, who told you at the Kelowna retreat – and who told the media, on the record and in no uncertain terms – that you are making a mistake.

You are, guys, you are.  Your plan to prevent us from hiring our kids, and lessening our taxes, a bit?  I’ve employed most of our kids as Summer students.  It’s helped me and it’s helped them.  But you, Messrs. Trudeau and Morneau, want to make the meagre benefits that flow from that illegal.  It’s like you are saying we small business owners – the family who runs the convenience store down the street, or the family that run a restaurant you guys go to – are somehow akin to crooks, hiding untold millions in a Carribbean tax haven somewhere.

Also a mistake: what you want to do with so-called passive income.  That’s the money that a small business makes, that small business owners like me want to leave in the business.  I’m still going to pay tax at a high rate if I use that extra income as a dividend or something, later on.    For reasons that are beyond my understanding, however, the tall foreheads at the Department of Finance think it is illegitimate that small businesses would want to keep income invested in the small business – to, you know, grow it and hire more people.

A third controversy – in which some owners convert what would have been taxed as salary or dividends into capital gains – shouldn’t be.  On that one, I think you are probably right.  I know some doctors and lawyers are upset about you taking away those sorts of tax planning measures, but I’m not one of them.  That kind of thing favours professionals who already earn big bucks, and that isn’t terribly fair to others.  

But the main problem, Messrs. Trudeau and Morneau, isn’t quite so much one tax measure or another.  It isn’t the policies, per se.

It’s the way you are handling this one, fellas.  Small business folks like me, various experts, the Tories, the NDP, and even your own MPs are telling you that you are making a mistake.  And, despite that, you insist that you are still going ahead.  

No changes, no compromise, no acknowledgement that you might be wrong on a couple things.  One of your backbench supporters even likened those of us who are worried to Marie Antoinette, eating cake and living in gated communities.  He deserves to be disciplined for that.

Anyway. I’m a small business owner.  Some nights, I still lay awake for many hours, worrying about payroll, worrying about losing some business.  You two, where you work?  You don’t ever have to worry about those things.  I don’t think you ever have.  But worry you should, fellas. 

This small business thing? It’s big.

Sincerely,

Etc.

44 Comments

  1. ian turnbull says:

    This shouldn’t come as any surprise to anyone. This government spends like drunken sailors. Of course they are going to find anyway possible to collect more money from the taxpayers. Between this, their carbon taxes, and getting into the drug dealing business they are hoping they can keep the party going.

    If it was ever about equality, then they would have considered reducing taxes for employed citizens to match the advantages they seem to feel exist with small business.

  2. billg says:

    Thank you for that.
    This little cash grab makes no sense to me what so ever.
    Conrad Black had a great opinion piece a month ago, where is the vision in Canada, where are the risk takers.
    I’ve employed people my entire life, from 4 to 10 people.
    I’ve donated prizes and money to local sports teams, charity’s and Service Clubs.
    I’ve never once topped the 6 figure salary, and, for a few years made less then every one of my employee’s.
    I do not have a pension, I have CPP and that’s it.
    My retirement date was around my 70th birthday and based on the current tax rules, income sprinkling was a major part of it.
    I choose this life, so, I don’t complain about my buddies with Hydro being fully retired at 54 years of age, glad for them.
    I have just been called a tax cheat, basically a bad Canadian, by two people who couldn’t navigate themselves around a small business if there lives depended on it.
    This is where Progressive Liberalism loses to the likes of Donald Trump.
    I’m not a Liberal at heart, Prime Minister Trudeau is my Prime Minister, he won because he was the best candidate.
    I will be miffed and disheartened if this bill is not tweaked and changed.

    • doconnor says:

      So you where going to sell your business (I’m guessing for less then it’s market value) in exchange for it to continue to pay you for not working? There might be other ways to implement that arrangement.

      • billg says:

        First, there are always options, doing work underground is the easiest way, I turn down clients on a daily basis asking for cash deals, why not, on a 5,000.00$ job they save 800$ minimum, 1000.00$ if you need the work.
        And, its very hard if not impossible to sell a small business anymore, client lists mean nothing anymore, and, in this new online era of business price beats out name for most people.
        I’m not a Left Right person. I do understand that we live in an era that most Conservative politicians cant grasp, and, its disappointing to watch.
        I did however not see this coming from this government.
        Its so counterproductive and just adds to the meme that only the rich own business’s and incorporate.
        There are many of us that don’t mind the long hours and the average salary because we build things, we solve problems, and, we are the community.
        Just seems like a kick in the groin, and, I didn’t see it coming.

  3. Matt says:

    What’s even worse is a Liberal owned polling company is kissing Liberal ass on this topic.

    Mainstreet Research did a poll last week claiming the majority of Canadians support these changes. There was of course one rather large omission from the polling questions.

    They never mentioned small businesses or the effect these changes will have on them.

    They framed it simply as “do you support the closing of tax loopholes used by wealthy Canadians?”

    Right out of the Liberal talking points about small business owners being “wealthy” Canadians.

    • CHarlie says:

      ‘Liberal owned polling company…’

      Don’t know where you’re getting this ‘Liberal owned’ notion from. Mainstreet Research has its largest partnership with Postmedia, whose board — as you’ll remember — unilaterally endorsed Harper in 2015. Not to imply that this association taints Mainstreet’s work — but you’re claim is counter to what the general impression would be.

      I know Quito responds to comments here from time to time, so I’m sure he’d take issue with your assertion.

  4. Mark says:

    Caveat: I’ve run several small businesses, and my wife is a physician (though presently unincorporated, as she doesn’t clear enough to get huge benefits, and we saw this coming down the pipe several years ago). I’m against these proposals from a policy perspective, but don’t think they’re the end of the world either.

    Politically, I think they’re counting on most people who are directly affected being either conservative voters, or if they are liberal, not being upset enough by this to switch in any great numbers. I don’t think they’re wrong.

    I’m sure they also counted on the doctors doing what they always do, being politically tone deaf. They’re drawing comparisons to higher income civil servants with pensions etc., and how basically this would cause them to suffer relative to others in the same (for lack of a better term) intellectual strata, cut into savings, etc. This isn’t going to resonate with most Canadians, over half who are living paycheque to paycheque, often relying on multiple, often precarious positions. It still reaks of “aren’t you so special you think you deserve all this stuff that none of us plebes get”.

    If the docs were smarter, they could have appealed to a sense of fairness. Explaining that the governments first chose, rather than increase fees to keep up with several years of rising expenses and inflation, to give them the ability to incorporate, so that the tax advantages would offset the fee increases they’d otherwise be getting. Then later on, again instead of adjusting fees to keep up with another several years of inflation and rising expenses, they allowed family members to be shareholders in these corporations, again entirely so that the tax benefits would offset the lost income.

    Twice the government gave doctors the ability to use corporations just for tax savings to avoid adjusting their fees to match inflation and expenses. Now they’ve arbitrarily decided to pull the rug out from under them, taking away what they explicitly gave in lieu of fair pay. This in effect cuts pay by 20% (or brings it back to levels from 2001, or whatever). That argument could appeal to basic fairness (which everyone should expect), as opposed to that they should expect benefits that most others can’t.

    It’s not as simple as that in reality of course, but I think the subtleties, like the provinces being the ones who allowed incorporation and the feds being the ones who want to take it away, won’t resonate much with most people.

  5. Pedant says:

    I’ve been waiting for you to write about this.

    My objection is that they seem to be going after mostly those who earn $100-200K per annum. Relatively well off, but not “rich” by any stretch of the imagination, especially not if they live in Vancouver or Toronto. They’re going after the upper middle class without laying much of a hand on the truly rich.

    Why aren’t they going after billionaire hedge fund parasites?

    Why are they preserving the 100% capital gains exemption on primary residence sales? This by far disproportionately benefits the wealthy, and completely excludes the 30% of Canadians who rent. Why can’t renters, who often put their money in other financial vehicles, be entitled to exemptions on their own capital gains elsewhere?

    Why is there no drive to increasingly tax non-resident non-Canadians who force middle class Canadians out of the real estate market in big cities while contributing almost nothing to our social services and infrastructure?

    Why not employ the resources of the federal government to uncover hidden, undeclared foreign bank accounts, and prosecute their crooked owners?

    You might argue that they have to start somewhere and this is as good a place as any. I disagree. Canada, for those who haven’t noticed, doesn’t really have much going for it for anyone with talent. Salaries stink compared to the US and mandated benefits (pensions, paid vacations, etc) stink compared to Europe. Canada incorporates the worst of both the US and European models without any of the advantages. As the US moves inexorably towards universal healthcare (no, not even Trump can stop it), that final trump card will be gone. If we want creative, talented, and educated Canadians to stay home, we need incentives for them that can override the crappiness of our pay packets and benefits. By allowing incorporation, those who are so inclined to start businesses can at least see a tradeoff to the long hours, no paid vacation, no pension, etc. Fine if the Liberals want to tweak it or cap the amounts that can be sheltered in the business, but the changes they are proposing go too far.

    Remember the brain drain of the 90s? It will make a comeback.

    The Eau-bros got their money through inheritance. Completely unearned, handed to them on a silver platter. They know nothing of what you describe Warren, those sleepless nights when starting a business, nor for that matter the stress of medical school + residency. They are hoping that pitting the somewhat-well-off against the less-well-off (while leaving alone the mega-rich) they will create an electorate wedge that will lead to a big second majority government. I am pessimistic enough to believe that they are right.

  6. Gyor says:

    I haven’t really payed attention to Trudeau new tax changes, mostly distracted by the NDP leadership race honestly, but if both the NDP, Tories, and their own Liberal MPs are worried about these tax changes, that is the left, right, and centre is worried, that says something.

  7. Matthew says:

    I too have been a small, and then medium business owner. As such, I had control over how to structure cash flows, as does any owner. Like anybody else, I split income as much as I thought I could get away with, but I did not pretend to myself it was fair while I did it. Yes, my wife attended board meetings (generally held at the dinner table, and minuted for tax splitting purposes). Kids got to earn up to the basic personal exemption, hiving off another $20k per year from my taxables. This are not requirements, or even desirable from an economists perspective. They serve ZERO social goals or objectives, other than to skew taxes in my favour. In fact, they damaged my business somewhat, as funds flowed into tax free zone whether the corporation could afford it or not, constraining subsequent years investments. My accountant just loved them though. He said it was a little tax relief for business owners, but I think what he meant was that he could play games shuffling money for fees. Business income is nothing special, and business owners do not deserve or earn any special treatment. especially when it is just a farce of compliance checklists, and a get out of tax free card. That puts the income tax system to shame.

    • Kelly says:

      Well said. There should be no favouritism on types of income. I think we should eliminate ALL deductions and lower the basic rates then add an additional high income surcharge. Of course a lot of accountants would get laid off!

    • sunfirexxx says:

      Thank you for putting your self-interest aside to look at this objectively!!

  8. cash says:

    Two rich kids (Trudeau and Morneau) just helped grow the underground economy.

    • mike says:

      I’m pretty sure the millionaire and the billionaire you refer to won’t be affected by these changes and their accountants will make sure of it…

  9. James Smith says:

    Before going out on my own as a small business person 19 years ago I’d worked for a couple of big companies and two small ones. I chaffed at the inflexibility of the big ones, the small ones suited me better as a designer; but there were always issues.
    I’ve have seen first hand where the motivation for this policy comes from. One company the whole family was on the payroll, did nothing other than disrupt business from time to time. While I drove to appointments in an old beater, & had to argue about every KM to get reimbursed, family members drove newly leased cars & SUV’s about every other year.
    Another firm sponsored a “Racing Team” that was the owner’s hobby competing in events in Canada & the USA.

    While I agree this proposed policy is a blunder not in its intent but to me, it seems that it’s a hammer being taken to a problem rather than the scalpel that’s likely required.

  10. Joel Bernard says:

    Yes sir, one more vote for the Conservative Party?

  11. Neil says:

    Warren, you usually get it right (that’s why I keep coming back to this site), but on this one you’re either mistaken or disingenuous. Nothing in the proposals will penalize small business people if they hire their kids. It will only do so if they “hire” their kids to do no work, but still pay them (and claim the expense). Similarly, if you take earnings and simply invest them, then they are “passive” and you are gaining an advantage because you only paid the small business tax rate to garner that principal, not the income tax rate a non-incorporated person would. If you use them in your business, then they become a legitimate expense and are not part of this discussion.

    Has the government totally messed up the messaging on this: Yes. Is it inherently unfair: No.

  12. Ronald O'Dowd says:

    Warren,

    There is no such thing as absolute certainty […] — John Stewart Mill. Could have fooled me.

  13. Tim Sullivan says:

    Warren,

    I have taken the same risks, had the same concerns about getting customers through my door and what I’m doing to my family. I’ve borrowed money and had more than a few sleepless nights. But for your incorporation, we are in the same boat.

    Except you get to retained earnings, dividends at a reduced income tax rate, control your pay and income split with whomever. I know of no restriction on who you can hire. Recognize, however, that these are tax dodges and at the moment, currently legal. No one is alleging illegal or improper conduct.

    It is unfair, however. Every dime you and your family members save not paying income tax which would be paid by someone in the same business with the same income but without a corporation, has to be paid by me and my family and everyone else.

    The income tax system is designed to tax income, not reward risk takers or punish the self-employed. Presumably the risk and reward comes in the financial success of the business or your personal satisfaction in not having a boss and the pride of ownership.

    Tell me why I should have to subsidize you for your risk-taking and income splitting. I have my own problems.

  14. BlueGritr says:

    Great column. But will Trudeau and Morneau (and Butts) listen? Doubt it. Because they’ve never known what it’s like to struggle.

  15. sadsack says:

    Bully for you Warren for hiring kids that actually did work, and even better having a wife as an equal partner, although I would make sure she earns more money than you. But as admitted in a comment above ‘sprinkling’ happens – more than we think, and it is not fair.

    So design the tax forms to expose the sprinkling. If a wife gets some tax it. If retained earnings are collected, pay normal tax rates not capital gain tax rates.

    Just basic fairness.

  16. Luke says:

    I haven’t been paying a lot of attention to this. other than noting the part about doctors and lawyers. For that I am on the same page — it is ridiculous (unless the doctor or lawyer is actually running a practice, hiring staff, paying rent, etc.). And so I was kind of tuning it out as noise.

    However, your first two concerns sound rather like a lot of this uproar isn’t mere noise. I’ll have to pay attention I guess.

    • Tim Sullivan says:

      I don’t hear many lamenting the change to lawyers’ tax situation.

      Doctors, yes. They are in such a pickle. You know, they have to ask nicely for their patients to pay their bill, whether they get cured or not.

  17. Sam says:

    Not going to go into details about this disaster of a policy, it’s all been said now.

    But I will say I made a prediction back in Nov 2015, that by the time Trudeau’s first term was over, the nation would be more divided than it currently was. Much, much more.

    We ain’t seen nothing yet..

    • Tim Sullivan says:

      You think this, tax policy, will divide the nation?

      Tax policy?

      • lance says:

        Do you have any idea what the proposed changes do to succession planning for farmers in the West?

        My brother in-laws wouldn’t have been able to by out my father in-law without having previously incorporating the farm and having the passive income in the farm. They wouldn’t have been able to afford the taxes.

        You wanna see a western revolt, try telling the boomer farmer that the succession planning they’ve been doing for 40 years now is no longer valid. S/he’s 70 now and there is no time for alternative plans. You try telling them that the kids are forced to sell if s/he dies.

        If you aren’t met with a shotgun up the nose I’d be shocked.

        • Tim Sullivan says:

          Wow, the “West” upset about something. Next they’ll accuse Trudeau of setting oil prices 40 years ago.

          • lance says:

            Careful, your shift is showing.

            Your question was whether bad policy will divide the nation. I answered, you affirmed the point with a previous example.

            How’d your attitude work out for you Liberals last time?

            Fool.

          • Tim Sullivan says:

            Bitch and moan, bitch and moan.

            “Oh, look, we put all this oil in the ground and now we want it out and all to ourselves!”

            The Liberal Party of Canada is the most successful political party of Western democracies.

        • Tim Sullivan says:

          … and I’m not sure the NEP was a tax policy.

  18. whyshouldIsellyourwheat says:

    The sad thing is that Trudeau and Morneau are letting the uber-rich and global 0.1%ers off scot free.

    With their privatization bank, they are welcoming the global uber wealthy to Canada to earn tolls and rentier streams off of our prime infrastructure assets with no risk. Taxpayers will take losses on any failed projects.

    The only purpose of the privatization bank is to shift risk from the wealthiest private investors to the taxpayer. The privatization bank is about risk free rentier streams to the global uber wealthy.

    The other thing about these small business tax changes is that it makes the CRA an even greater omnipresent threat with the added rules and the added reverse onus to justify every action. The added regulatory and stress cost is not an insignificant aspect of these changes. Why start a small business?

  19. Mario says:

    The goal should be tax simplification. Increase the basic personal exemption (tied to inflation).

    Get rid of the boutique tax deductions (the teachers now have a classroom supplies deduction).

    Increase the deduction for RRSP for those in the lower tax brackets.

  20. boopsie says:

    I wish that people would Wiki Edgar Benson, Finance Min for PT in the early days. What an amazing lot of stuff he did in his 88 years. We truly were colonials back in 1968.
    Thanks to Lloyd Robertson for reminding me!
    Trouble is, all those things have been tweaked to death, making the Income Tax Act an impenetrable tome. They will get this done.

  21. Mark says:

    I liken this to the 2010/11 BC Gordon Campbell mishandling of the HST issue here on the west coast. Not altogether a bad public policy objective, but so mishandled from a PR perspective that the then BC Liberal government had to put the whole thing to rest.

    • Dave says:

      You are giving the government way to much credit here , they didn’t choose to put the whole thing to rest . They had no choice but to scrap it , we had a referendum. It was a very bad public policy objective and lost because of it.

  22. cash says:

    Harper/Flaherty/Oliver are looking better day by day,

  23. Dave says:

    My offspring won’t work for me , our business can have slow times now and then , so I have to lay off my help. The CRA already thinks I’m a cheat by default because they won’t allow UI deductions for family members so no UI benefits for them . These tax changes just follow suit in treating us like cheats and liars , needless to say no succession here .

  24. ottlib says:

    A couple of points. One, this is not an issue to energize ordinary people. Certainly, those who will be impacted by it are not happy and the media, needing to fill the 24 hours news cycle with something, are more than happy to report on that unhappiness. Everybody else either does not care or might actually agree with the government.

    Why? Because the people impacted by the proposal are not like most ordinary workers and taxpayers. Many are professionals like doctors, lawyers, dentists and veterinarians and most people know that they are not struggling along on near minimum wage. In February of 2017 I had to have my dog’s left knee surgically repaired. It cost $4 thousand dollars all in. Then in June of 2017 I had to have gum surgery, which cost me $4800 plus $500 for the diagnostic tests. Each procedure took only about 1.5 hours to complete and in both cases we had to wait months for the surgeries. Looking at the estimates of the finacial impacts put forth by the representatives of these professionals it can safely be said that the vet and the dentist that serviced my dog and I only need to do two or three additional procedures during a calendar year into order to offset that impact. In other words, what is being proposed will not cause them any undue hardship and Canadians know it.

    The second point is we are still talking about a proposal and not a bill. The government put it out there to give people a chance to react to it and to prepare proposals on how to improve it. When the actual drafting of the bill occurs, that is when the lobbyists representing the various groups will earn their retainers as that is when the real negotiations with government officials will take place. We have all been observing politics long enough to know that the bill that will eventually be put forward to implement the proposal will look markedly different from the proposal currently being discussed.

  25. libraman says:

    They should have left the income splitting that Harper started in place. Then more could benefit, to some degree at least. Cap it at the same rate that is proposed for the small business.

    Yeah, it may help families with one higher income earner. But that is better than the current scheme that most favours families with 2 high incomes.

  26. Robespierre says:

    #WelcomeToCanada

    To reach the Century Initiative’s 100 million Canadians goal, the bourgeoisie must start paying their fair share. For example, “Ali, who came to Canada from Somalia in 1992 with five children, had six more kids with her husband after she arrived. But in 1999 her husband left and a year later a workplace injury forced her to quit her job as a cleaner.” (Toronto Star). The good news is under the new Canada Child Benefit, women like Ali now receive $64,400 per year, tax free. This griping is really quite counter-revolutionary and indicative of white privilege. Look to Marie Antoinette as a cautionary tale of those who won’t support the People. French intellectual Alfred Sauvy coined “Third World” referencing the Third Estate – the commoners of France who opposed the First Estate (clergy) and Second Estate (nobles). Sauvy: “This third world ignored, exploited, despised like the third estate also wants to be something.”

  27. John says:

    Well said, but I want to add a small correction. You speculate that Doctors use their corporations to convert income to capital gains which is not possible for professional corporations.

    It’s also a bit inflammatory to refer to them as people who “earn the big bucks.” It’s kind of rude to throw highly educated, intensely hard-working professionals under the bus because they earn a high income.

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