Opinion: Proposed federal tax changes will hurt small business and the B.C. economy

The changes may be aimed at the wealthy, but they will affect many middle-class business owners

Credit: Credit: Jaime Lauren Photography

Melissa and Dave Dobernigg, owners of BX Press Cidery and Orchard in Vernon, with their family

The changes may be aimed at the wealthy, but they affect many middle-class business owners

For decades, small businesses and entrepreneurs have been lauded as the backbone of the economy, held up as examples of the innovative and creative Canadian spirit, and praised for their role in economic growth, job creation, and prosperity, even in tough economic times.

But this July, the federal government announced its plan to implement sweeping changes to the tax system—changes that could be detrimental to small- and medium-sized enterprises (SMEs), particularly in British Columbia, where the economy depends on their successes.

With SMEs playing such a central role in our province’s and our country’s economic performance, the proposed federal tax changes will make it harder for those same business owners to maintain and grow their businesses. By changing their ability to share, or sprinkle, their income with family members (who often pitch in for nothing when the going gets tough), to maintain passive investments within their corporation and to convert regular income into capital gains, the federal government is taking away some of the very tools owners use to mitigate some of the risk in running a small business while allowing them to put a little more away for their retirement.

Ottawa says these changes are aimed at the wealthy, but most of the business owners they will negatively affect belong to the middle class. Statistics Canada shows that two thirds of small business owners earn less than $73,000 per year; half of those earn less than $33,000. The tax rules they have been playing by for decades have just changed.

Melissa Dobernigg and her husband, Dave, are third-generation apple growers and the owners of BX Press Cidery and Orchard in Vernon. They were only able to inherit the farm through the lifetime capital gains exemption, without which it would have been impossible for Melissa’s father-in-law to pay the taxes required to pass on the business. As she and Dave put it: “We literally ‘risked the farm’ and were even turned down by several lenders.”

Their situation? “We have no benefits—we work seven days a week, light until dark, year-round—and no vacation time. We have no pensions, no safety net, and pay a considerable amount of EI and CPP for our employees.”

Dan Reader is president of Murray Latta Progressive Machine Inc. Next year, the Surrey-based company itself will celebrate its 100th year in operation. MLP Machine is a diverse custom manufacturer serving industries such as forestry, oil and gas, and natural resources, as well as government. The company employs 160 people and contributes millions to the economy. Dan, who has owned MLP Machinery for 22 years,  is deeply concerned about how the proposed changes to the tax system will affect his years of investment and hard work.

“The government doesn’t understand the risk,” he says. “It is not just my risk; it is a risk for my spouse and my family as well. To buy into the business, I mortgaged the house. From the point of view of me and my spouse, we are in this together. This affects me, my wife and our whole family. These are the risks you take as a business owner.”

Dan has good reason to worry. “We don’t have programs like employment insurance, or the availability of programs like severance,” he says. “If I lose my job, I lose my company. It would be a mess.”

Tax policies were put in place by previous governments to support the growth of independent businesses and to acknowledge the higher burden they face in complying with regulations.

Changing these policies shows a lack of understanding of the investments—both monetary and personal—that independent businesses owners make in their companies.

“I am reading that this is only going to hit the top 1 per cent, or at least that is the intention,” Dan Reader notes. “We consider ourselves middle-class. We have RRSPs, but we don’t have pensions like what you would have in the federal government or at a lot of big companies.

“As a business owner, in order to save some money, you have to take risks,” Dan adds. “Unlike defined pension plans. So we set that up 23 years ago with our company. And we have been doing some modest savings within a holding company and through income splitting.

“These proposed changes, really attack that whole setup—but it is also going to affect how we go forward as business owners.”

Losing small- and medium-sized businesses in B.C. will affect the future of the province and the country.

Melissa Dobernigg outlines some of the ways that BX Press Cidery contributes to her community. “We employ part-time and full-time employees, all paid well above minimum wage,” she says. “We support local non-profits through our tasting room. We support local businesses, freight companies, musicians, caterers, and many trades in the construction, ongoing maintenance and possible expansion of the building. We have been a huge benefit to Vernon tourism and helped facilitate the burgeoning craft cider industry in B.C.

“A farm like ours would have been sold, had the trees cut down, and four lavish homes built on the newly created hay fields,” Melissa says. “You see many examples of this reality around the Okanagan, where farms did not pass on to the next generation.”

Melissa adds she isn’t complaining about the commitment it takes to make a small business successful. “Our hearts are in the operation and we love what we do,” she says. “If there is not going to be any potential financial reward for increased risk and investment, then why would we take the risk? Such drastic changes, as I understand them, truly seem to crush and penalize the very backbone of our Canadian economy and the families who are working so hard to provide a life for themselves and others, and create wealth within our communities.”

These are the most sweeping changes to business taxes in 50 years, and they are being done with only 75 days of consultation, at the height of summer. The proposals will affect all industries: farming, manufacturing, exporting, health care, natural resources, restaurants, you name it.

Everything I am hearing from independent business owners in B.C. is that these changes have the potential to discourage entrepreneurs from going into business—and could hurt employment and growth as owners look for other ways to offset the added costs to themselves and their companies.

The proposed tax reforms will do nothing but harm the people of B.C. and Canada. These changes will slow economic growth, innovation and job creation.

The BC Chamber of Commerce stands with our colleagues and members from across the country in asking the federal government, and Finance Minister Bill Morneau, to take these proposals off the table. We urge the government to launch meaningful consultations with the business community to address any shortcomings in tax policy without unfairly targeting independent companies.

Val Litwin is president and CEO of the BC Chamber of CommerceThe BC Chamber is British Columbia’s largest and most broadly based business organization, with 36,000 members of every size and from every sector and region of the province. Its purpose is to know what’s on B.C.’s mind.