Ian Russell, the president of the Investment Industry Association of Canada (IIAC), has released a letter detailing his concerns regarding the federal government’s proposed tax treatment of passive investment income in private corporations and the negative impact he believes this change would have on small businesses across the country.

Funding retirement savings

The government proposed the tax changes in an effort to increase tax fairness among Canadians. However, Russell says the changes “will constrict the flow of capital to new and emerging enterprises, reflecting the active role in private corporations in financing the private equity and venture public markets.” He adds that the changes will “make it more difficult for small business owners and professionals to build capital to fund retirement savings and meet other contingencies.”

The changes will raise taxes on income earned from passive investments, increasing from 55 per cent to 73 per cent, he says. Russell underlines that these tax hikes come in addition to tax increases previously introduced by the federal government, raising the top marginal personal income tax rates.

Fairness for all taxpayers

The federal government consulted on the proposals over a 75-day period in the summer, which Russell says was an unreasonably short period of time. “If fairness is in question – not just between categories of taxpayers, but for all taxpayers – then the government should undertake a comprehensive review and reform of the tax system, focused on the myriad tax-preference measures (exemptions, deductions, credits) that are part of the tax code to determine if they are cost effective and achieving their intended purpose, and broadening the tax base and lowering rates,” he says.

Russell suggests that the government reverse the proposed changes regarding passive investment income and instead introduce tax reforms that promote equity investment in small private and public businesses. He says the government should consider a “roll-over” provision that would “enable investors to sell at least a portion of ‘locked-in’ capital in financial and real-estate investments without incurring capital gains tax, or with a substantial reduction in capital gains tax rate, if the proceeds are re-invested in the equity shares of small business.”

Canadian version of the UK Enterprise Investment Scheme

Furthermore, he suggests that the government could consider a Canadian version of the UK Enterprise Investment Scheme (EIS). The EIS “provides a personal tax credit for the purchase of small business shares, and an exemption from capital gains if the shares are held for more than three years, the tax expenditure can be limited by the size and eligibility of the investment,” he explains.

Increase TFSA limit

Finally, Russell suggests that the federal government could moderately increase the contribution limit in TFSAs from $5,000 to $7,500. “These TFSA accounts have proven to be popular savings instruments by middle class Canadians who have invested in a range of different financial assets including shares of small businesses.”

To learn more, read the full letter on IIAC’s website.