I'd like to share the story of a good friend of mine. It's a Canadian success story. What is happening to his family, and others like them, should concern all of us.
The story
Warren owns a successful business in Burlington, Ont., and employs 125 people. He has poured his blood, sweat and tears into the business since starting it 25 years ago.
He has sacrificed much. He didn't spend enough time with his children when they were younger, because the business demanded his attention. Further, he put all his assets at risk over the years by making personal guarantees to borrow the funds necessary to grow the business. The early days were tough. He reminded me of a time when he had to take cash advances on his credit cards just to pay his staff. He took no salary for the first two years the business was in operation.
Warren's wife, Jeanie, made sacrifices, too. She gave up her full-time job to focus on their children and household, allowing Warren to focus on the business. Warren is the first to acknowledge that Jeanie has been as critical to the success of the business as he has been. She's been a rock of stability at home. More than this, the equity in their home, which she helped to build while she was working, enabled Warren to borrow enough money to create a business that provides its employees with growing incomes, and has made many of them very well off financially.
Today, Warren and Jeanie are reaping the rewards of the risks and sacrifices they've made. With the success of the business, Warren now has a good income. Jeanie shares in this success by receiving dividends from the company, as do the children, who have also made sacrifices over the years. None of the employees begrudge this family's financial success. On the contrary, they are grateful to be beneficiaries of the hard work and risks that started the business, which now provides them with good incomes.
The problem
Warren is irate. "Tim, there is no way I would make the same sacrifices all over again if I were starting the business today. I simply wouldn't bother."
I asked him why he felt this way. "The government today has changed the tax system so much, and is planning to change it again to stack the odds against the small-business owner. If I did this all over again, I'd move to the United States first."
When the Liberals won the last federal election, they quickly increased personal tax rates on the financially successful – often business owners – to give more to others. Although Warren wasn't happy about the tax-rate increases made effective in 2016, he tolerated them because he believes he should pay a higher percentage of tax than people with lower incomes. He buys into the idea of a progressive tax system.
This Liberal government, however, seems so focused on the idea of redistribution of wealth that it completely fails to recognize that when a business owner becomes successful, and increases their income and net worth in the process, those employed by the business become better off as well. Successful businesses produce more, and more highly paid, employees.
When a business owner risks everything they own, is it so terrible that they should, say, triple their income and net worth, especially if it means the employees of the business double theirs, over time? Apparently this is a problem for the Liberals.
Proposed tax changes introduced on July 18 are designed to reduce the ability of business owners such as Warren to split income with family members, unless those family members have contributed meaningful labour and capital. I guess Jeanie's sacrifices don't count here. I think Finance Minister Bill Morneau needs to explain that to her personally.
The proposals also will restrict Warren's ability to save money for retirement inside his corporation. The Liberals want Warren and Jeanie to be treated exactly like any employee who hasn't started an active business and owns a corporation. Perhaps Mr. Morneau should explain to Warren why the risks and sacrifices he made to create 125 jobs shouldn't provide him with any benefits greater than what his employees receive.
If the Liberals are trying to build a stronger middle class, as they claim, they will be doing exactly the opposite by penalizing small-business owners for their success.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.
Click here for a detailed analysis of what the proposed tax scenarios will cost small business owners.
Tim Cestnick