Why the Liberal plan to tax entrepreneurs who invest will come back to haunt Canada
By now you are probably familiar with the Liberals’ proposed changes to the tax treatment of privately held corporations, announced in July and currently under intense scrutiny by various stakeholders.
There are two basic pillars to the proposed changes, and both are predicated on the loaded notion of “fairness” among taxpayers. The first pillar addresses “income sprinkling”, or splitting income among spouses and family members of business owners in order to lower total taxes paid by a household. It appears as though pretty much everyone sees major problems with these proposals, and there are countless impassioned and well-informed pieces available online that address the issue in detail.
The second pillar is the proposed dismantling of the 40-year old structure that allows private business owners to effectively shelter their non-reinvested earnings in investment companies (holdcos), investing 74-cent dollars as opposed to the 47-cent dollars that high-earning employees are left with to invest on an after-tax basis.
A great deal has been written about the negative effect this will have on small business owners — the lifeblood of the Canadian economy — from farmers to dentists and doctors to corner store owners. I agree with the many who believe that these entrepreneurs ought to continue to receive tax incentives for starting businesses in order to promote risk taking and drive GDP growth in our country.
Relatively little has been written, however, about the very wealthy entrepreneurs who own not-so-small private companies (the proposals cover all privately owned businesses, not just small businesses), many of which generate millions of dollars of profits each year to their founder/shareholders.