'We don't trust them': Farmer one of many business owners wary of proposed tax changes

This was the 100th crop year for Curtis Penner's family on his farm near Kane, Man., and while he says he'll pass that legacy on to the next generation, he's starting to wonder how much it will cost.

"I can eat the apples off the trees that my grandfather planted. I go swimming in the pond that my father dug," he said, explaining what the farm his great-grandfather bought in 1918 means to him.

The federal Liberals have proposed a number of changes to the way corporations are taxed in Canada that have Penner worried his children won't be able to afford to take over the family business.

The Senate finance committee is in Winnipeg on Thursday to meet with business leaders and groups to gather feedback on the proposed tax reforms. They're holding public hearings at the Fort Garry Hotel from 9 a.m. to 2 p.m.

The proposals include changes to the tax rate on passive income — excess money that is held within a corporation without being immediately reinvested. The proposed changes would also introduce a "reasonableness test" for dividends paid to family members and alter the way capital gains taxes are calculated.

Faced with backlash from small business owners, doctors, and farmers across the country, the federal government has revised some proposed changes and backed off others entirely.

They abandoned a proposal that would make it harder to convert income to capital gains, which farmers said would have penalized family farm transfers by leaving parents with a significant tax bill when they transferred the farm to their child. But the proposals still worry Penner.

"We don't trust them as far as we can spit," he said.

Passive income

Mark Jones, a chartered professional accountant who works with many businesses that use the existing tax rules, will speak on behalf of the Winnipeg Chamber of Commerce.

"The fact that there's still so much uncertainty around [the proposed changes] is the thing that's causing concern," he said.

Phillip Dunphy, the corporate controller of Neptune Properties, which invests in real estate and small enterprises, also said there's still a great deal of confusion around the proposed tax changes.  

For example, the changes to the way the government will tax passive income makes it difficult to determine exactly how much tax a business will pay, he said.

"I'm a CPA. I've spent time reading this legislation, and trying to figure out how this is going to affect our businesses, and it is incredibly complex. So I'm looking at our business partners and I'm thinking, 'How are they ever going to understand what tax rate they're going to be paying?'"

There are many reasons why a company would keep excess income and put it in passive investments, Dunphy said, including sustaining seasonal businesses through slow periods and saving money for future expansions.

One company he has invested in sells ice cream, which is a seasonal product. The company makes most of its sales in summer, so by fall, they have a lot of cash on hand.

"You're going to need it to do something for you, and it's not smart business to just have that sitting in your bank account."

It also affects farmers like Penner, who lease to their kids or sell to them below market value because the cost of land is so prohibitively expensive. The passive income earned from those leases would quickly put Penner over the proposed $50,000 threshold set by the federal government.

Family business

He could sell it to them at below market value, but changes to capital gains taxes could make that more difficult, as well, Dunphy said.

"Right now, if I invest personally in a building and later sell, as with any capital gain, the capital gains tax rate is 50 per cent of the normal tax rate. There is a mechanism that allows a corporation to do the same thing, so they're getting taxed in the same way that a person would."

The federal government proposes eliminating that mechanism, which means an incorporated farmer like Penner would pay more for selling his property to his kids than if he did it as a private individual.

Both Dunphy and Jones are also worried about a proposed "reasonableness test" for dividends paid to family members of business owners. The government already applies a similar test for salaries, to ensure family members paid by the company actually work for the company.

"The government has never before tried to look at dividends as reasonable or unreasonable. This is the first time that this concept has ever come up," said Dunphy.

Loren Remillard, president and CEO of the Winnipeg Chamber of Commerce, said many businesses use family savings when they are launched, making spouses and other family members investors in that company.

"That requires Finance Canada or Revenue Canada to determine what is not reasonable, which introduces a significant level of subjectivity into the mix," Remillard said.

Whatever the federal government decides to do with tax legislation, Penner said, he will never sell his farm out of his family.

"We'll do whatever we have to. That farm is a base that provides an anchor for our whole family, whether they are farming or not. My nephews, my nieces, wherever they are, they know that the farm is stable."