Hitting the pause button is the best action to take on proposed changes to the small business tax, say agriculture representatives and farm accountants.
“The July 18 proposals are flawed in many ways and we do not think that they can be fixed with just a few tweaks,” Tanya Knight of the accounting firm MNP LLP told a Senate national finance committee hearing in Saskatoon Nov. 8.
The committee is holding public hearings across the country to consult with local government officials, tax experts and other stakeholders on the controversial tax reform.
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
Senator Raynell Andreychuk of Saskatchewan said the committee plans to present its final report with recommendations to the federal government Dec. 15.
Several witnesses expressed concerns about potential negative impacts of the proposals and the lingering uncertainty.
“The proposed tax changes as written and currently proposed could see some small businesses in Canada pay up to 16 times more in taxes,” Knight said. “There is no such thing as a quick and simple tax fix.”
She advised the government to set aside the current proposal and undertake a substantive consultation that includes all stakeholders to im-prove fairness, predictability and efficiency.
She also wants to ensure that new proposals are simple and administratively executable for small business owners.
Agricultural Producers Association of Saskatchewan president Todd Lewis agreed.
He told the committee that the accounting industry has thoroughly studied the calculated and unintended consequences of the current proposal and raised a number of flags on issues.
The government announced several amendments to its proposed changes following the 75-day consultation period that expired in October, but Lewis said outstanding concerns in the proposal will still have serious negative implications for family farming and the future of agriculture.
A looming question is whether land that is owned in a company by retiring farmers is treated as passive investment income, which the government describes as money left in a corporation for purposes other than to invest directly in growth.
Under the new legislation, up to $50,000 of passive investment income can now be sheltered annually before higher tax rates are enforced.
Increasing the tax burden on rental income could also have far reaching consequences by reducing the amount of lease land available to beginning farmers.
“The $50,000 ceiling they put on that income is not enough because the claw-back on that is significant. It could be up to 73 percent on that income,” Lewis said.
Added farmer Terry Youzwa from Nipawin, Sask.: “Why should anyone be subject to 73 percent tax when others aren’t? How is it possibly fair that someone who has put 30 to 40 years into building that entity have their retirement plan, which they receive financial advice from lawyers and professional financial experts all along the way, and by a flip of a switch from the federal government they’re offside and suddenly paying 73 percent on a portion of their retirement plan?”
Lifetime capital gains exemption is another key issue that will affect farmers.
Lewis said current provisions already create a financial disincentive to transfer farm assets to family members instead of arm’s length buyers. Original proposals on converting income to capital gains would have made this situation worse.
“They’ve told us that they’re going to pull back on anything that’s going to affect intergenerational transfers. It’s going to remain as it has been. We’re taking them at their word on that,” said Lewis.
Added Youzwa: “It would be nice to know that the lifetime capital gains exemption will be fully protected so that when farmers divest and in a transaction they are not penalized for transferring to a family member over a third party. Why should we sell to somebody else other than our own family? Why would there be incentives to do so? What is the government’s objective for doing such a thing?”
The government has also pledged to amend proposed changes that affect reasonableness and income sprinkling for farm operations.
For example, it remains unclear how contributions such as child care will be measured or how much weight will be given to past capital contributions provided through off-farm employment.
“Certainly spouses should be exempt from any reasonability test and the income sprinkling side of things and how family members are treated, it’s got to be very general at best because every family has different situations and it’s very hard to fit everybody into one box,” he said.
Lewis’s bottom line to any new changes is a reasonability test that is well defined and not subjective during an audit by the Canada Revenue Agency.
“It’s something that recognizes the family farm unit (as) one size doesn’t fit all,” he said.
“They’ve (government) said they’re going to put reasonable tests forward that should speak to that for farm families. We’re taking them at their word, but it’s to be determined. We’re cautiously optimistic, but we still have no clarity on that.”
Current draft legislation as it now stands could potentially see producers enter into risky investment decisions with lingering uncertainty.
“It puts farmers in a very difficult place, and we’re going to have a very compressed tax planning season if these new regulations come out over the next number of weeks and we only have four, five or six weeks to try and make changes,” said Lewis.
