Jill and Derrick Green launched Green Imaging Technologies in 2006 with the help of investments from family members.
More than 10 years later, the shareholder group of the oil-and-gas tech company has grown to include investors from outside the family, and the company is doing well enough to issue dividends.
This should be encouraging for family members who were part of the original investment team, but if the Trudeau government adopts proposed tax changes on incorporated businesses they will have to pay a much higher tax rate, says Jill, the Green Imaging CEO.
They invested in me, they invested in my idea,” says Jill. “They became shareholders in the company because of that. But now because they’re related to me, somehow I’m trying to income sprinkle with them, and give them something that they don’t deserve.”
Finance Minister Bill Morneau was in Fredericton last weekend to give a speech at the annual general meeting of the Canadian Chamber of Commerce. Jill and other members of the business community came to hear what he had to say and take part in a question-and-answer session.
She didn’t come away feeling any better about the proposed reforms, which she says are unfair and disincentives to starting a business or investing in the growth of an existing one.
Some of the proposed changes are especially discouraging for family businesses or ones supported by family members. Jill says many entrepreneurs look to family members to help them get businesses off the ground, so this has the potential to stop certain businesses from ever launching in the first place.
I would not have started my company if I didn’t have that support early on,” says Jill, who employs 11 people at Green Imaging. “With these proposed changes, how many entrepreneurs is it going to stop from starting a business?”
Jill and Derrick both work full time in the business and draw salaries, so income sprinkling doesn’t apply to them. However, she may fall ill at some point, she says, and have to leave the business for awhile. They would then have to pay the higher tax rate on any dividend while she was off work.
“One of the things that scare me, and I talked to my accountant about this, what would I do if I got sick and had to take a year off from my company?” she asks. “If I was issued a dividend, it would be in the highest tax bracket even though that would be the only income coming in for me. Again, this all about fairness, and this doesn’t feel fair.”
Jill also sympathizes with businesses where one spouse stays at home while the other works long hours on the business.
She says Derrick’s father ran a business and his mother stayed at home with the kids, and her work would not have been valued under the government’s “reasonableness test” for determining if a person actually did work in the business.
“My father-in-law worked really hard growing his business, and he travelled and was gone all the time,” she says. “My mother-in-law had the job of raising four children basically on her own to support her husband, so he could go out and earn money and income for the family. But under these rules, her contribution to having things in place so he can do what he needs to do to grow the company is not valued under the ‘reasonableness test.’ ”
In his Fredericton speech, Morneau said such a test is a fair way assess whether income sprinkling is appropriate.
“People can be compensated if they are rightfully part of that business either through capital or through labour,” Morneau said to hundreds of small business owners at the Fredericton Convention Centre. “Why is there anything wrong with that being something that’s demonstrable?”
Jill is also concerned about proposed changes to the way “passive investment portfolios” are taxed. As it stands, many small businesses set aside a portion of their earnings in investment portfolios and use those funds as insurance in case they have a bad year or need to make an investment in equipment or the growth of the company.
The government is proposing to tax the income that goes into those investments at a higher rate than they do now. During his speech in Fredericton, Morneau said these kinds of investment portfolios are a disincentive to growing businesses now.
“We have hundreds of billions of dollars in passive income in Canadian-controlled private corporations,” he said. “The numbers I see is we’re putting another $27-billion into these passive investments each year in our country.
A tax system that was intended to incent people to put money into active business has, as a side effect, [caused] that amount of money [to be] parked on the sideline,” said Morneau. “If we can find a way to ensure that more of that money gets invested in active businesses then it can have a really important impact on our economy in the long term.”
Jill disagrees with Morneau’s assertion that this money is simply “parked on the sidelines.” The investment acts as insurance for potential downturns, which are a natural part of her sector.
“Our company is a healthy company,” she says. “We’ve put money aside in case of downturns, which happens cyclically in the oil and gas sector. There are times when you need to have money put away … Now that income would be taxed differently. It’s not encouraging me to save money to keep my company healthy.”
Jill and Derrick moved home from Cleveland, Ohio, a decade ago to launch Green Imaging. They love Fredericton and believe it’s a great place to raise their kids. They want to stay even though they could operate their business anywhere in the world because of the global nature of their client base.
However, she says, it won’t be easy to get entrepreneurs from other places to start businesses here.
“We work with a lot of really large companies in the oil and gas sector, and they often will do research and development joint ventures with other companies,” says Jill. “So someday down the road there’s a possibility somebody would want to have a research and development facility in Fredericton.
“Why would they want to do that now when there are all these tax disincentives to doing business?”
This is part of a series of stories Huddle is doing on how the proposed tax changes could affect business owners:
- Small Business People Aren’t All Millionaires ‘Rolling Around in Their Money’
- Medical Resident Faces Uncertain Future in N.B. With Proposed Tax Reforms
- How Proposed Tax Changes Threaten Family Businesses Like Crosby’s Molasses
- Why Some Small Business Owners Say Proposed Tax Changes Undervalue Women