Small Business People Aren’t All Millionaires ‘Rolling Around in Their Money’

Jason Rideout. Image: submitted

ST. STEPHEN – Jason Rideout is much like the small-business clients he serves on a daily basis in St. Stephen.

The 37-year-old has two partners in his accounting firm, ANR, that employs five other people full-time in a small-town economy that depends on these kinds of businesses. He has a stay-home wife with young daughters.

And yes, he takes advantage of the income-sprinkling provisions of the tax code that allow him to transfer some of that income to his wife for tax purposes – one of the controversial provisions now under review by the federal government.

“I’m able to put long hours in during our tax season because my wife can stay home,” says Rideout. “She plays an integral part in our family and allows me to run this business. These new proposals say, ‘well, we need to determine her fair market value.’ In my situation how do you measure her impact on my business? She’s an integral part, she helps out in the background.”

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Rideout wants ordinary New Brunswickers to understand that many small business people who will be negatively affected aren’t the tax-dodging wealthy people the Trudeau government says it’s targeting with the proposed reforms.

“I try to step back and say, ‘How is the regular person looking at this…if they actually picked up the tax proposal, it paints the entrepreneur and business owner as a tax cheat and these people aren’t tax cheats. They’ve been using the legislation that’s been in place and enacted,” says Rideout.

I say to anyone I’m talking to – especially non-business owners – that not all business owners are millionaires that go home and roll around in their money.”

Tax policy is a challenging subject for most New Brunswickers, so Rideout tries to frame the issues in practical, easily understood ways. So with the first proposal to cut down on income sprinkling, he talks about how it directly affects him and his wife, which he says mirrors the situation of many entrepreneurs that need someone to stay at home because of the relentless and all-encompassing nature of running a small business.

The second federal proposal involves leaving extra revenue inside a business that is currently taxed at relatively low rate. An owner could withdraw it from the business and invest it in RRSPs, for example, which many non-business owners do to save for retirement.

For the business owner, it makes more sense to keep that money in the business for a rainy day, says Rideout. It could end up being retirement income, he says, but it also acts as a cash reserve in case a piece of machinery breaks, or there’s a slow period and additional money is needed to make payroll.

Being conservative, a lot of business owners will take a modest salary and some dividends to live on, but they like the idea of [keeping money] in the company because there may be a slow period,” says Rideout. “I’ve seen it day in and day out with different entrepreneurs. There’s peaks and valleys in businesses, and there’s a need for cash.”

Rideout says those businesses have been paying around a 15 per cent corporate tax on cash reserves up to $500,000. They then pay an additional 25 percent on the money that remains. Under the proposed reforms, the 25 percent tax would be increased to 50 percent.

“It most affects the established business owner,” says Rideout. “Say they’ve operated a successful business for 30 years – a good size business employing eight-10 people. We’ve got lots of those in this area. They’ve worked under the assumption of the tax legislation [in place now]. They’ve saved some money in their companies for retirement [that would now be taxed at the higher rate].”

The third component of the proposed reforms eliminates multiple capital gains exemptions – each worth $835,000 – available in a single business.

“In the simplest terms, you could have a husband and wife owning a business, and they each have a capital gains exemption if they sold the business,” says Ridout. “Let’s say I came along and bought the shares in their company. They could shelter around $1.6-million in capital gains. So I could buy their business for $1.6-million and they don’t pay any tax. Under the new legislation only one person could use [the exemption].”

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Rideout says the proposed forms will have an impact on individual business owners and people looking at starting a business. Many may look to sell or dissolve their businesses, and many others may choose to remain employees rather than incur the additional costs and risks of being an owner.

I worked for eight and a half years at Deloitte,” he says. “If you really look at it, if these proposals come into play, the likelihood of someone [like me] leaving their job to start a company would be slim to none.”

And this could have negative repercussions for the economy, he says, especially in small places like St. Stephen that depend upon small-scale entrepreneurship to grow.

“These folks work hard and they create jobs,” says Rideout. “They drive the economy, especially in rural New Brunswick communities like St. Stephen. Small businesses are the backbone. My concern is the implementation of this proposal and higher tax rates mean a loss of jobs, or loss of services.”

St. Stephen’s growth strategy, predicated upon growing the small-business community, could be at stake, says Rideout.

“Our resurgence in St. Stephen over the last two to three years is based on people creating businesses and creating jobs for themselves,” he says.

“We have things like ‘business bootcamp’ to help businesses get off the ground, and I’m a mentor. We have people say, ‘I want to live in St. Stephen but I don’t have a job that fits my skill set, so I’m going to start a business.’ There have been successes that way. Does this proposal stifle it?”

This is part of a series of stories Huddle is doing on how the proposed tax changes could affect business owners: