As many of you have no doubt read or heard by now through various media sources, the Federal Government is in the midst of proposing changes to the Canadian Income Tax Act that have been described by others as the most significant in the last 50 years.
In all my years in Practice and accounting I have never heard the level of outrage directed at the current proposals brought forward by the Government.
The reason I believe that to be the case is that the proposals in part strike at the very heart of what the Canadian tax system has always been about, something known as the principle of “tax integration”.
It is a simple concept that posits that one dollar earned by an employee or unincorporated business owner will be taxed at the same rate as one dollar earned by a corporate owner.
Regardless of what you hear from the Government or any other sources this has always been the case. The only difference has been that some corporate owners have had the ability to control the timing of when they pay a portion of their tax, but not that they will ultimately pay the same tax as anyone else.
This principle of integration will essentially be abrogated however should the recent Government proposals become law.
It will, in fact, become punitive for an incorporated business owner to earn certain types of income in their business such that they will pay far more tax than an employee or unincorporated businesswoman would in similar circumstances, in some scenarios close to double the tax.
I would certainly be hard-pressed to describe the excess taxation of one class of business over others to be “fair” but that is the message Government is sending.
More egregiously some of the rules under discussion will make it punitive to try and pass your very own business on to your children or other family members if you so choose. In many cases this would result in paying more than double the tax someone selling their business to a third party would pay, is this fair? Should the Government be involved in influencing to whom you sell your business?
Even further proposed changes will mean that CRA auditors will determine what you can pay to your spouse or other family members in your own business, what is “reasonable”, based on only a series of vague guidelines. If you disagree with your auditor, too bad, your only option will be to go to Appeal and then Court, and all the time and expense that entails.
Once the very principle of tax integration has been breached, the guiding principle of our taxation system for generations, where will the Government stop in targeting specific groups it does not feel are paying their “fair share”?.