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Hootsuite CEO says tax changes for small business could hamper innovation

Hootsuite CEO Ryan Holmes.

hootsuite

The head of one of Canada's best-known tech darlings says Ottawa's proposed changes to small business taxes could hamper innovation and prevent Canada from becoming a hotbed for technology giants.

"I've been an entrepreneur and a small business owner for a large part of my career. I know that a lot of those businesses operate on the margins," Ryan Holmes, CEO of social media management platform Hootsuite, said in an interview at the Cascadia Innovation Corridor Conference.

"I would encourage the government to look very closely because ... it is causing a lot of concern to business owners," he said.

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In mid-July, the federal government released a three-pronged plan to end several tax provisions used by some small businesses.

One provision at risk of being eliminated is income sprinkling, a practice that permits business owners to lower their taxes by passing income to family members, even those not active in the business, who are in lower tax brackets.

The government is also proposing limits on the use of private corporations as a way to gain tax advantages when making passive investments, and limiting the conversion of a corporation's regular income into capital gains that are typically taxed at a lower rate.

Smaller tech companies have created their own structures – much like doctors, lawyers and other small business owners, who have also rallied against the changes – that provide the ability for them to have a different income stream or different way to flow income, said Bill Tam, CEO of The BC Tech Association.

For these companies, the proposal "has created the conditions for an additional worry" around taxation, he said, adding he's heard these concerns from a few of the group's 540 members.

The association has encouraged its members to support the Greater Vancouver Board of Trade's effort to reconsider the changes, he said.

Limiting income splitting will impact compensation for family members who may not be actively involved in the business, but share in its risk, and the practice is essential to entrepreneurs' retirement planning, according to the local board of trade's website.

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Meanwhile, the higher tax rate on passive investments will reduce the funds available for such purposes and limit entrepreneurial reinvestment in the economy and their businesses.

That environment runs contrary to the federal government's stance as one that puts innovation front and centre. The buzzword received hundreds of mentions in the budget and the Liberals have committed to $950-million to a supercluster program.

If the government wants to have more head offices in cities like Vancouver, Holmes said, that won't happen by convincing established companies to move to the West coast as that involves significant cost, among other issues.

"If we want to get more head offices there we need to create more Hootsuites," he said. "I think you need to be very favourable at the small end of the market."

Those start ups can become big businesses with large, local headquarters.

Hootsuite, which launched in 2008, now employs close to 1,000 people in Vancouver and several offices abroad, according to its website.

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Holmes is not the first to criticize the controversial tax proposal. Doctors, lawyers, tax professionals, shopkeepers and others who have incorporated their small businesses to reduce their tax bill are among those speaking out.

Tech firm leaders have been successful in changing the Liberal government's mind about policy in the past. After discontent from a number of tech firms, Ottawa abandoned a plan to cap how much could be claimed through stock option deductions.

The prime minister's principal secretary, Gerald Butts, responded to criticism of the proposals on Wednesday morning with a recognition that the measures are not just a question of fairness but also of boosting government revenues.

"If we all want the Canada we say we want, we have to pay for it. If our government encourages our wealthiest citizens to opt of progressive income tax, we will not be able to do that."

Prime Minister Justin Trudeau has previously said the government is holding public consultations to hear Canadians' concerns and ensure there are no unintended consequences. The consultations end Oct. 2.

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