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Down on the farm: tax reforms will hurt family businesses

Bill Morneau’s tax reforms are supposed to close cynical loopholes that unfairly lower corporate tax bills — but real family businesses will be harmed in the process


(Annie Spratt/Unsplash)

Until recently, two things were certain in life: death and taxes. We can now add a third one: botching the promotion of a tax reform for political gains. Finance Minister Bill Morneau’s tax reform has been a communications disaster.

Claims about Ottawa’s intentions to revamp our tax system for small corporations have been ridiculous. Some predict a recession due to the changes proposed, while others declare the end of entrepreneurship as we know it. We should all take a collective deep breath and figure out how changes will affect our economy.

What needs to be underscored, though, is how Morneau’s vision for taxing small corporations will impact our agrifood sector.

Generally, the tax system is not really about pensions, legacy and social programs. Yet for a family-owned business, it is — and there are thousands of them in agrifood. In farming, Canada now has more than 43,000 incorporated farms, compared to around 23,000 incorporated farms in 2001.

Proposed tax changes penalize families

Despite the fact that we have fewer farms overall today than in 2001, more of them have opted to convert their operations into a corporation to provide an incentive to the next generation to take over the farm.

Proposed changes on capital gains would make it more expensive for a current family member to acquire the farm than for a third party. This is a critical piece of a highly complicated puzzle: keeping families and jobs in rural Canada is not an easy task and many agricultural producers are using our tax system wisely to secure the future of their businesses.

In food processing, retailing and in the food service sector, countless family businesses are wondering how family values immeasurably embedded in anything the corporation does can survive the next generation.

Chart showing the decline in the number of farm operations in Canada, 1960 – present

(Statistics Canada)

Income sprinkling is another issue Morneau is attempting to address. Presently, corporations can hire family members who work for the enterprise, which reduces the tax rate for everyone. Current rules about who can be compensated and at what level are ambiguous, at best. Morneau wants to change that, and for a good reason.

Several small corporations pay family members, who do not necessarily work for the company, to pay less taxes. This practice should stop but family businesses are really a different breed.

Defining tasks in a family-owned business can be difficult. Many of the contributions made by family members are ad hoc and not easily categorized. Recipes, tricks of the trade, family traditions all matter a great deal to whatever a small food outlet is doing. It is nothing like being an accountant, a doctor or a dentist.

A family business is like — well, a family. The enterprise survives daily by relying on favours and duties as assigned. On a family-owned farm, a restaurant or in a small food processor, job profiles are vague, at best.

Condescending, awful rhetoric

This political nightmare began in July when Ottawa launched a consultative process on how best to address tax planning practices that it believes are being used to gain unfair tax advantages. Individuals set up corporations to pay less in taxes in a variety of ways. Ottawa’s intentions are noble, but it is the bombastic tone used as a backdrop to promote the plan to Canadians that has been less than effective. Consultations end Oct. 2.

What has really caused many of the problems is the awful, condescending rhetoric coming out of Ottawa, labelling small business owners as a group of cheats and greedy tax evaders trying to dodge the system by using loopholes. That was simply insulting.

The government anticipates that the new regulations will bring in barely $250 million a year. For those thinking that the Liberals are looking for ways to increase revenues to pay for a ballooning deficit, they are wrong. This is really about politics, purely and simply.

Prime Minister Justin Trudeau’s egalitarian agenda to serve the so-called middle class is motivating the government to implement these changes. The tax regime needs change as some small corporations are using current tax rules to save money unjustifiably.

Most opponents have been quite vocal in recent weeks, but their corporations will survive the changes. However, the stakes are much higher in agrifood and farming.

Infographic on farming in Canada

(Statistics Canada)

Agriculture, food sector at risk

This is not about being unwilling to pay more taxes. Rather, it is about the viability of an entire economic sector. Our tax regime should differentiate and give our rural economy and family corporations some level of immunity.

Ottawa should think of fiscal incentives the agrifood sector can use to grow. Right now, it is not clear how this can be achieved. As Ottawa is attempting to bring more fairness to our fiscal landscape and fix what is largely an urban issue, it shouldn’t penalize our agrifood sector.

Despite Morneau’s disgraceful performance as a tax reform salesman, changes will most likely happen, to the despair of many. Changes to our tax system are obscure concepts for most Canadians who have never had a company. Even Canadians with corporations would have a hard time understanding what is being proposed.

The confusion that has led to the hysteria we are seeing today is really the government’s fault and no one else’s. When it comes to taxes, painting everyone with same brush is unacceptable.

Ottawa will get its way in the end, but it should at the very least accommodate the unique intricacies of our agrifood sector.

The Conversation

Sylvain Charlebois is Professor in Food Distribution and Policy at Dalhousie UniversityThis article was originally published on The Conversation. Read the original article.