Tag Archives: small business

Tax Changes Worth Considering

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In the world of fiscal and monetary policy, once you make specific changes, it’s very difficult to turn back on them.

Unfortunately, this is true for reductions that we’ve seen in the past with specific tools like the GST (now HST) which was reduced by Stephen Harper, Dalton McGuinty and other leaders in an economically questionable tactic to get into office.  Today, our economic instability continues and yet our leaders still commit to reducing corporate tax rates, forcing us to shake our heads at the gross inequality of Canadian citizens compared to capital owners.

With this in mind, I’d like to spin the topic a little towards something more positive:  eliminating or reducing tax deductions.  I’m sure lots has been written about this, but I personally feel that little has been done to explore the impact of altering deductions when it comes to corporate and income tax policy.  Here are some standard deductions, all of which create questionable policy outcomes:

  • Car and gas:  the more I drive for business, the less I pay in tax.  Larger organizations would have entire ‘fleets’ that are deductible for tax purposes.  Also, allowing car, gas and other fleet deductions encourages the consumption of the wrong kind of transportation and carbon-based fuels.  My mind would change if someone actually developed a functional hydrogen vehicle or mode of transport that used an alternative fuel, but allowing these carbon deductions only keeps us stuck in the 20th century.
  • Meals and entertainment:  the more I eat and the more hockey games I go to, the less tax I pay.  This makes no sense.
  • Land and real estate assets:  I don’t know a lot about this, but my instincts are that if we taxed inactive land assets, they would be used for economic activity or put on the market.  While this might push down the value of land in the short-run, it would ease the cost for entrepreneurs to open up office space or local retail locations.  It would also help put an end to the miles of waste that we see everywhere now with closed offices, land for lease and excessive apartment costs.
  • Business losses:  my understanding is that business losses that are accumulated in any given year can be carried forward for use indefinitely years for the company in question and are also transferable to other subsidiary or parent companies.  Are there ways to proactively reduce losses that are carried forward against profitable organizations?  I know I’m playing with fire on this, but at what point should we just force unprofitable companies to be shut down?
  • Charity activity:  ‘charity’ runs counter to the goals of profit maximization, so why do we allow massive deductions against corporate activity (some might argue ‘meddling’) with charities and non-profits?  Why don’t we just increase the deduction at the personal level?
  • Professional services:  how many lawyers are enough?
  • Dividend tax preference:  once again, I’ll concede that the economics on this topic are grey, but giving preferential tax status to dividend income seems to run counter to income earned from non-dividend sources.
  • Special incentives and investment programs:  All levels of government are hobbled by excessive grant giveaways and most of the companies that benefit from these programs have shareholders that simply don’t need handouts from the public.  Great examples of this are the Canadian Magazine Fund and the Canadian Film and Video Tax Credit.  Do we really need to give CTV and Quebecor hundreds of millions of dollars each year to produce what amounts to propaganda?

Of course, most of you who are intensely more familiar with tax policy would quickly jump on me and argue that many of these deductions are equal in the sense that small businesses and co-ops can make use of them as much as a large corporation can.

Unfortunately, most small businesses can’t even afford these expenses and rarely take a moment to spend any more than a couple of hundred dollars per year on the odd hockey game or taking a buddy to brunch.  As someone who describes himself as a small business owner, I know this to be true.

All I’m suggesting is that we consider caps on these deductions and for some, look at ways to eliminate them all together as effective ways to shape social policy and reaction out of prudent fiscal measures.  For example, now that we live in the digital age, why do we need to drive to meetings?  Why don’t we just do more via Skype calls or by leveraging other video-conferencing tools?

In an ideal world, we address simply questions of ‘equality’ and ‘fairness’ by understanding that our tax system is excessively skewed to the benefit of those that own it:  governments and the corporations that own them.

Simple modifications will improve financial liquidity for our governments and ensure that fairness is restored to average citizens.  I think this is something we can all accept, possibly including those with #occupywallstreet.

Ultimately, any or all of these changes push the needle towards a flat tax, but that’s something best discussed in another article.

The TMX Takeover and Alternative Business Models

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Canada has a basic financial industry that has become very complicated over the last few decades (possibly centuries), largely because of our messed up Constitution.

Because we’ve always tolerated provincial jurisdiction over financial regulation, we’ve never been able to develop a robust financial market compared to similar-sized economies.

The impact of this is that we’ve always been reliant on external providers of capital to fund our economic activities.

Recently, things started to change as demands for a consolidated national regulator have emerged.  The world’s top companies probably woke up to the fact that companies like Potash would be buying them instead of the other way around if we were able to streamline our regulatory environment.  This explains the array of takeovers in recent years.

The London Exchange bid for the Toronto Market Exchange (TMX) Group is just another jump in this direction.

Of course, in the most bizarre state of irony, Canada’s west – represented largely at the federal level by Conservatives – are getting socialism and Canada’s central provinces – dominated by Liberals and the Bloc – are getting fierce capitalism.  I say this because in order to protect votes in the west, the Conservatives are protecting key assets from non-US foreign interests (Potash, the Tar Sands) and letting Ontario go to ‘hell in a hand basket’ by insisting on transaction such as those involving the TMX, Domtar, Dafasco, etc.  All of these actions carve out the base of Ontario’s manufacturing and financial infrastructure, ultimately penalizing those who don’t support the Conservatives.

Socialism for us, capitalism for the rest of you, indeed.

Sorry … that’s a big side-bar discussion that should take place elsewhere.

Getting back to the real story:  I believe that the takeover of the TMX will occur and Canada will lose all of its financial security and industry because people in Toronto simply don’t vote for Conservatives.  This will be a political rather than economic decision and Canada’s blue-blood Bay Street business base will lose as a result.

What’s the good news?  Inevitably, people that want money will demand alternatives.

The even better news?  There are lots of alternatives available.

In any basic market economy, the following are ways that you can organize a business or organization:

  1. Sole proprietorship
  2. Partnership
  3. Incorporation – privately held
  4. Incorporation – publicly traded (ie. on an exchange)
  5. Registered Not-for-profit
  6. Registered Charity
  7. Co-operative Business / Organization

I believe that the vacuum that will be left by the TMX will push demand for nearly every form of organization listed above with the exception of ‘Incorporation – Publicly Traded’.  For many, this may be a bad thing because it means those with big dollars will continue to invest in good ideas and people, but those with relatively few dollars – ie. your basic RRSP holdings – will have nothing to buy in the early stages of growth.

This can be seen as a failure of our capitalist system to encourage efficient use of ALL savings – not just those of the elite – when it comes to investment opportunities.

Arguably, our system has failed most people because we’ve been living that way for some time.  ‘Angel’ and institutional investors absorb a lot of risk with new ventures, but they also reap most of the returns.  Crumbs get thrown to the general public.

What we need to do is figure out the best ways to promote and foster local growth in Canada.  The only way to do that is to look into things like co-ops, non-profits and other organizations like Community Supported Agriculture (CSAs).  All of these will materialize more readily if we make it easy to push our personal savings into these organizations.

Here are a couple of ways to do this:

  1. Expand the definition of qualifying companies that one can put in their RRSPs.  Investing the market has become a bit of a joke, as we all know the last ones who actually profit from any activity these days are shareholders.  The world has become so packed with insiders manipulating stock prices that Ponzi schemes and gambling are starting to look more attractive.  Adding co-ops, small businesses and other organizations to the list of eligible securities is a great way to make investments AND shelter return on capital.
  2. Make contributions to or support of CSAs tax deductible.  We make music classes and gym attendance tax deductible.  Why not put real, organic, natural and local food on the table with a tax deduction as well?
  3. Expand the deductions that people can make when contributing to qualifying not-for-profits.  NFPs contribute just as much – if not more – to our economy than many of the ‘big business’ magnates pulling for tax rebates and public-paid bonuses.  We need to improve on ways to accelerate getting our funds from our savings into their hands.
  4. No penalty for small business deductions from RRSPs.  If I manage my own small business and I’m fortunate enough to have an RRSP, I should be able to finance my company via RRSP deductions without penalty.  We’ve done this in the past with home ownership loans and we should do it for small businesses.

These are just a few basic ideas, but you get the idea.  Once we start to function without a capital exchange, we’ll come to realize that there are extremely economically viable options out there.

Why Corporate Tax Cuts Don’t Matter to Me

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And Shouldn’t Matter to Most Canadians

Corporate tax cuts border on the theoretical.  Will cuts to the world’s largest corporations generate more jobs here or enrich the treasury of the countries that they’re home to?  Does Wal-Mart really “invest” more in Canada when they pay lower taxes?  Does GM do more R&D research here simply because we’re making it easier for them to have a fatter bottom line?

Do corporations generate more jobs than the local resources that they use?

The short answer is no, but I’m sure all of these and more questions merit additional research.  In fact, the Progressive Economics Forum argues that corporate income tax cuts can actually lead to a reduction in employment.

With all that said, I’ll tell you one thing:  corporate tax cuts mean jack shit to me.

Here’s why.

Like millions of other Canadians, I run and own my small business.  It’s a sole proprietorship and like all sole proprietorships, 100% of the income that I generate goes to my personal income so I’m taxes at the personal income rate, not the corporate rate.  Yes, as far as the CRA is concerned, I submit a business filing every year, but the filing reflects my personal income and not a business income.

In most provinces of Canada, the number of small businesses that employ 1-4 people (ie. usually 1 + a family member) almost always exceed 50%, in many cases 60%.

By the end of 2009, the number of small businesses was approximately 2.4 million.  I’m guessing that today that number is closer to 2.5 million.

In other words, a significant portion of the population of this country is dependent on small business income.

To put it another way, slashing corporate income taxes is nothing more than posturing and a platform for ripping off the average guy or girl that works 16 hours a day to make their business work while the ‘Fortune 500’ make more fortunes.

If any party in this country wants to win a majority in this country, all they have to do is stop dropping their pants for the bigwigs and start fulfilling on promises to support small business in this country.  Here are some ideas related to this kind of platform:

  • Allow a $100,000 business income exemption for any qualifying small business (to be defined).
  • Alternatively, promote a tax exemption for qualifying small businesses to the tune of $250,000 or three years, whichever comes first.
  • Allow RRSP investments in your own small business, subject to approval (similar to the popular ‘Home-Buyers Plan of the 1980s/1990s).
  • Consider alternative models for small business and economic activity, including co-ops, non-profits, charities and so on.  Then consider tax breaks for these organizations as well.
  • Stop wasting money on mega-budget programs like defence and prison systems.  Use saved money for digital and physical infrastructure.

Getting 2.5 million small business owners on your side will translate to influence.  They’ll make donations, but more importantly, they’ll hang your sign in their window, they’ll influence their family members and they’ll maybe even volunteer some of their precious time to support your team.

What are your suggestions?  I’d like to know, as I’d like to expand on ideas for generating good platform from the small business angle.