Tax changes for small business could hamper innovation, tech CEOS say

SEATTLE _ Canada’s tech community, including the head of one of the country’s best-known firms, is starting to join a growing group grumbling about Ottawa’s proposed changes to small business taxes. They say the plan could stifle investment and hamper innovation in a country trying to poise itself as an entrepreneurial hotbed.

“I would encourage the government to look very closely because … it is causing a lot of concern to business owners,” Ryan Holmes, CEO of social media management platform Hootsuite, said in an interview at the Cascadia Innovation Corridor Conference.

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 creates an additional worry around taxation, he said, adding he’s heard 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 lobby the government to reconsider the changes, he said.

Limiting income splitting will impact compensation for otherwise uninvolved family members who share in the business risk, as well as entrepreneurs’ retirement planning, according to the local board of trade’s website.

Meanwhile, the higher tax rate on passive investments will reduce the funds available for such purposes and limit entrepreneurial reinvestment, the board claims.

All streams of funding for entrepreneurs, including personal savings, family support, and angel and institutional investors, are at risk, said Jade Bourelle, CEO and co-founder of Talemetry, a Richmond, B.C.-based recruitment firm that uses smart technology.

Budding business people will find themselves in a position where they will have to give up a greater share of equity in their companies in exchange for funds, and will pay higher taxes if they ever sell the company, he said.

“So why do it in the first place?” Bourelle asked.

An environment where investors funnel their money to other countries and entrepreneurs put down roots elsewhere 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. A relocation like 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.

While doctors, lawyers, shopkeepers and other who have incorporated their small businesses to lower their tax bill have been speaking out, the tech community has remained largely out of the public discourse.

“It takes a little bit of time for people to understand the impact and I think that’s happening now,” Bourelle said, adding he expects vocal opposition to “ramp up” from lots of different sectors.

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 out 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.