CATA urges feds to reconsider tax changes to passive income, saying it benefits tech SMBs

Despite the outsized reputation of companies such as BlackBerry Ltd. and OpenText, the majority of Canada’s technology sector consists of startups and small and medium-sized enterprises, with a few large companies thrown in the mix, and the Canadian Advanced Technology Alliance (CATA) wants to make sure any changes to Canada’s tax policy treats them fairly.

In its latest release, the Ottawa-based tech industry lobby group argues that since smaller businesses mainly rely on stock options, profit-sharing, and passive income to compensate employees, any changes to how they’re taxed should take them into account.

Passive income – income accrued based on investments and stock options – is essential to growing businesses, but in its proposals to update the Income Tax Act, which CATA and others have criticized, the federal government would essentially be taxing businesses up to 73 per cent of their investment income.

“We are kickstarting this important conversation with a blog post and video interview and have been encouraged by the apparent willingness of the federal Liberals to listen to and act upon the concerns expressed by Canadians with respect to propose changes to the Income Tax Act,” CATA CEO, John Reid, said in the Oct. 31 press release.

As Financial Post contributor Allan Lanthier put it in a recent column, the government’s current proposal would apply its former tax rate of 50 per cent to passive income of up to $50,000, with income from existing savings grandfathered under the former rules. A corporation could also accumulate savings of up to $1 million for future business expansion, investments in new businesses, to weather business downturns, and for retirement.

“This limit may well be sufficient for a professional corporation or a small business with no expansion plans,” Lanthier wrote. “However, it is woefully inadequate for a large and growing business.:

CATA’s release includes six reasons why Canadians should care about passive income:

  • Passive income is effectively the return SMEs receive on their retained earnings;
  • SMEs rarely post any retained earnings until years into their company’s development’
  • Under the proposed tax regime and its new Equal Pay provisions, entrepreneurs will ultimately be paying their employees, especially at retirement, much more than they would be able to receive themselves, making it a disincentive for entrepreneurs to start a business;
  • “Passive investment” is still investment: it drives a significant share of the economy including stock markets and venture capital. Taxing it at 73 per cent converts active investments into passive taxes.

Paul Labarge, member of the Innovation Leadership Council and partner at LaBarge Weinstein LLP, says the proposed changes announced in July were not welcomed by most of the business community, but that the recent government commitment to more discussion has been well received.

“Issuing the legislation in the middle of the summer was not a successful step and the brevity of consultations were not either,” Labarge explains in a video posted to CATA’s website. “Fortunately, they’ve taken a step back and looked at the comments that have been made and restricted the areas where they want to make changes.”

“I think, however, my call to everyone evolved would be to say learn from that, expand the consultations because the uncertainties are significant,” he continues. “I would discourage what looks like a negotiation and encourage what looks like a collaborative effort.”

Labarge wants to see more industry stakeholders included in the discussions.

“[These] discussions need to be held in an open, frank, and collaborative way if we’re going to have legislation that doesn’t become another battlefield,” he adds.

Echoing this thought is CATA’s Reid, who concludes that listening is good but consultation is better.

“The difficulty with adopting or advancing a series of proposals without a preliminary consultation is the risk – evident from the reaction to the July 18 proposals – of a substantial backlash,” Reid wrote in the organization’s Oct. 31 release. “The key is to have the government understand that the determination of fairness is a societal principle and not a public service employee determination.”

“The inherent conflict of interest of one group benefiting differently from others being the sole arbiter of fairness is simply not sustainable or defensible.”

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Jim Love, Chief Content Officer, IT World Canada

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Mandy Kovacs
Mandy Kovacs
Mandy is a lineup editor at CTV News. A former staffer at IT World Canada, she's now contributing as a part-time podcast host on Hashtag Trending. She is a Carleton University journalism graduate with extensive experience in the B2B market. When not writing about tech, you can find her active on Twitter following political news and sports, and preparing for her future as a cat lady.

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