A tax turnaround that punishes the risk-takers

The federal government has proposed significant changes to the Income Tax Act that would harm small business owners. We’ve seen this kind of tax turnabout before and it’s both ugly and unfair.

Some politicians and much of the media are describing these business owners as tax cheats, and have demonized them.

The Canadian Taxpayers Federation has taken up the cause of small business owners in fighting the proposed tax changes, which would affect family-owned corporations.

The provisions under attack were originally created to encourage people to build owner-operated businesses. The prevailing opinion – and it’s still valid – was that our economic base and most of our potential growth will come from small and medium-sized enterprises (SMEs).

Starting and operating an SME is no picnic, particularly in the early years. These business owners work long, hard hours, often with meagre compensation. The failures rates are high, the risks are significant and the stress is intense.

So the tax rules were modified to give more flexibility to SME owners to plan and manage their monetary lives.

Now, after many of these SMEs have weathered the early years and are showing tidy profits and earnings (and building the economy), they’re being used as an example to support the notion that all SMEs are tax cheaters and need to be punished.

Years ago, when I was a salaried employee, a similar situation arose. The federal government believed there was a shortage of affordable rental housing, so it created a multi-unit residential building (MURB) program specifically targeting investors like me. They amended the tax act to allow development costs and rental losses to be written off against salaried income. This was an incentive for people to invest and support a rental property in order to fill the rental housing shortage.

Here’s how MURBs worked:

Developers would start a MURB and seek investors to purchase units in the complex.

The development costs for land servicing and utilities would be aggregated and assigned to investors on a unit-by-unit basis. These costs could then be written off against salaried income. In most cases, this would result in the investor receiving a large tax refund in the first year of ownership.

In most cases, the developer would then become the rental property manager and handle the day-to-day affairs of the complex. Rental revenues were pooled, as were expenses like interest, taxes, insurance and repairs. That way, individual investors didn’t need to be involved in rental activities. The property manager would provide an annual accounting for the complex and each unit. Then each investor would be told how much they would have to subsidize the complex’s operations. In most cases, this subsidy was considered a loss and could also be written off against salaried income.

Joe Batty is a Troy Media columnist

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