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

SEATTLE — The head of one of Canada's few tech "unicorns" and other industry players are joining the chorus of opposition to Ottawa's proposed small business tax changes, saying the plan could stifle investment and innovation in a country trying to p
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SEATTLE — The head of one of Canada's few tech "unicorns" and other industry players are joining the chorus of opposition to Ottawa's proposed small business tax changes, saying the plan could stifle investment and 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. Hootsuite is among a handful of Canadian tech startups that have reached valuations of $1 billion or more, also known as unicorns.

In mid-July, the federal government released a three-pronged plan to end several tax provisions used by some small businesses. The plan would eliminate income sprinkling, a practice that permits business owners to pass income to family members who are in lower tax brackets.

It would also limit the use of private corporations as a way to gain tax advantages when making passive investments and limit the conversion of a corporation's regular income into capital gains, 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 a different income stream or flow, 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.

Innovation is a top priority for Ottawa. The buzzword received hundreds of mentions in the budget and the Liberals have committed to $950 million to a supercluster program.

A spokesman for Finance Minister Bill Morneau said Wednesday that the government is committed to supporting "hardworking entrepreneurs" and the changes are not aimed at them.

"We are proposing to address unfair tax planning strategies that allow some wealthy individuals to use corporate structures to shelter income from higher personal tax rates," he said in an emailed statement.  

Some entrepreneurs are not convinced.

The changes could put all streams of funding for entrepreneurs, including personal savings, family support, and angel and institutional investors, 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 could find themselves in a position in which 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.

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."

 

 

Follow @AleksSagan on Twitter.

Aleksandra Sagan, The Canadian Press

Note to readers: A previous version of this story incorrectly identified Gerald Butts's title. He is actually the prime minister's principal secretary.



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