From: AlanBaggett@volcanomail.com   
      
   Why the Liberal plan to tax entrepreneurs who invest will come back to haunt   
   Canada  : CRA SOTW    
      
   This is one of the few cases that all Canadians should be up in arms about   
   taxing the rich. It's bad policy, and it's bad for all Canadians    
      
   By David Kaufman    
      
   By now you are probably familiar with the Liberals’ proposed changes to the   
   tax treatment of privately held corporations, announced in July and currently   
   under intense scrutiny by various stakeholders.    
      
   There are two basic pillars to the proposed changes, and both are predicated   
   on the loaded notion of “fairness” among taxpayers. The first pillar   
   addresses “income sprinkling”, or splitting income among spouses and   
   family members of business    
   owners in order to lower total taxes paid by a household. It appears as though   
   pretty much everyone sees major problems with these proposals, and there are   
   countless impassioned and well-informed pieces available online that address   
   the issue in detail.    
      
   The second pillar is the proposed dismantling of the 40-year old structure   
   that allows private business owners to effectively shelter their   
   non-reinvested earnings in investment companies (holdcos), investing 74-cent   
   dollars as opposed to the 47-cent    
   dollars that high-earning employees are left with to invest on an after-tax   
   basis.    
      
   A great deal has been written about the negative effect this will have on   
   small business owners — the lifeblood of the Canadian economy — from   
   farmers to dentists and doctors to corner store owners. I agree with the many   
   who believe that these    
   entrepreneurs ought to continue to receive tax incentives for starting   
   businesses in order to promote risk taking and drive GDP growth in our   
   country.    
      
   Relatively little has been written, however, about the very wealthy   
   entrepreneurs who own not-so-small private companies (the proposals cover all   
   privately owned businesses, not just small businesses), many of which generate   
   millions of dollars of    
   profits each year to their founder/shareholders.    
      
   Because we live in a “tax the rich” period of Canadian history (including   
   the highest income tax rates seen in at least two generations), it is not   
   popular to speak out in favour of the top one per cent of the one per cent,   
   since these taxpayers have    
   been demonized by many groups, all in the name of fairness.    
      
   Without going into the mechanics of it, the proposed effective 71 per cent tax   
   on passive investments by private corporations (i.e. earnings by companies not   
   reinvested into the business but rather into other investments of any   
   description) strives to    
   achieve “real time integration,” or a state in which entrepreneurs’   
   profits will be treated as if those monies had been received as salaries.    
      
   What seems to be lost on the pitchfork-toting legislators storming the gates   
   of the rich is that the proposed legislation, while seemingly “equal,” is   
   both unfair and draconian.    
      
   It is true that taxing a salaried employee making $1 million per year the same   
   in real-time as a business owner who makes $1 million in profit makes them   
   equal. But fair and equal are not the same thing. It is unfair to tax business   
   owners — even the    
   most successful among them — equally to salaried employees, who do not take   
   on the significant personal financial risks associated with entrepreneurship   
   and job creation.    
      
   Legislators knew exactly what they were doing when they created the current   
   system for the taxation of private businesses — creating incentives for   
   risk-taking by rewarding success with favourable tax treatment of profits.    
      
   To think that taking a machete to the existing incentives without affecting   
   the behaviour of those involved is both crazy and naïve.    
      
   First, assuming that Canadian risk-takers would take the same risks in the   
   absence of tax incentives is like assuming that people would give as much   
   money to charity without the tax receipts those donations generate, or that   
   investors would support    
   exploration and development of high risk resource-related projects in the   
   absence of flow-through tax benefits. Removing incentives — especially those   
   so deeply entrenched in our tax code — will dramatically reduce the   
   behaviour promoted by those    
   incentives, often resulting in a decrease in total tax dollars received as the   
   tax rates effectively increase.    
      
   The corollary of this is that anyone thinking about buying an existing   
   business in Canada from the countless Baby Boomer entrepreneurs who see the   
   value of their business as their nest egg will now have to think twice,   
   reducing the value of all of those    
   businesses across the board.    
      
   Second, the Liberals are missing a critical piece in the “tax passive   
   investments to avoid sheltering and achieve real-time integration” approach:   
   Passive investments are passive to the investor, but are anything but passive   
   to those in whom the    
   investments are made.    
      
   Entrepreneurs — especially those with significant retained earnings — tend   
   to invest in other entrepreneurs, since it’s what they know. Tens of   
   billions of dollars are invested each year in business start-ups and growth   
   through a variety of debt    
   and equity instruments in businesses often starving for the growth capital   
   they require.    
      
   Taxing these passive investments at 71 per cent will — and of this I am   
   certain — significantly reduce any incentive to take investment risks with   
   retained earnings, dramatically affecting capital formation by active   
   companies and, again, reducing    
   the overall taxes collected on those monies when measured in dollars instead   
   of percentage points.    
      
   Third, and perhaps most importantly, the draconian measures proposed will   
   create not only a disincentive to take risk in the first place, but a strong   
   incentive to study and adopt complex structures to take fortunes offshore,   
   resulting in the type of    
   conundrum now faced by American legislators — how to change the tax code to   
   stop taxpayers from paying their taxes outside of the country to avoid   
   outrageous tax rates for business.    
      
      
   [continued in next message]   
      
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