How Proposed Tax Changes Threaten Family Businesses Like Crosby’s Molasses

William, Jim and James Crosby
William, Jim and James Crosby. Image: submitted

A few years ago, Crosby’s Molasses landed a major contract with a large North American food and beverage company.

The company undertook a $7.5-million expansion at their Saint John facility and hired 25 new people. It was a significant period of growth for the 138-year-old company, made possible in part by the cash reserves they had to make the necessary investments.

In a recent interview at Crosby’s head office and production facility, company president James Crosby said another future upgrade of this kind would be difficult if the federal Liberal government adopts the proposed changes to the way incorporated businesses are taxed. The cash they hold in reserve would be taxed at a much higher rate, he says, so they would have less money to invest.

Crosby believes this would hurt middle-class workers – the very people the Trudeau government says it’s trying to help with the proposed changes.

“This is not going to help Crosby Molasses expand, grow, reinvest in our business and keep us a local family-run business,” says Crosby.

“The Liberals are painting this as, ‘there are rich people and then there’s the middle class.’ In reality, the average person is not going to benefit if all these small businesses are unable to reinvest and grow their businesses.”

Since late July, when the Liberal government first proposed changes to the way incorporated businesses are taxed, Crosby says he has been bothered by the way Ottawa has pitted one class against another – the middle class versus the so-called wealthy class; salaried workers versus company owners.

Crosby also doesn’t want people to think he’s complaining just to lower his tax bill. “It’s not about, ‘poor me,’ ” he says. The survival of family-run companies like Crosby’s is at risk, he asserts, which means owners and employees alike have a stake in the outcome.

“There are going to be consequences for our future growth because of these plans, and that’s not going to be good for our employees,” says Crosby.

As a family-run business, Crosby’s is affected by two of the three proposed areas of change. He isn’t personally affected by how the rules on income sprinkling could be reformed because he’s actually an employee right now. He won’t become an owner until he and his brother, William, the company’s Sales Manager, buy the company from their father, Jim.

But the original plan has been derailed, he says, by the proposed changes to the rules around taxing “passive investment” portfolios and capital gains.

Crosby says he started working in the family business 11 years ago. At that time, his father started the planning process for passing along Crosby’s to James and William, the two family members active in the business.

The idea was that James and his brother would use the earnings from the company to buy their father out over a period of five years. The proposed changes on how capital gains are taxed scuttled that plan. Crosby says his father would now have to pay twice as much tax by allowing his sons to buy him out over time.

“In one fell swoop the government announces these tax changes and completely derails our entire plan,” he says. “Now it’s going to cost my father twice as much in tax to do this, and they’re saying it’s not going to have an impact on our ability to grow our business, reinvest in our business and create jobs.”

It’s also going to take much longer because his sons were going to use some of the company’s earnings, amassed over time in their holding company, to buy him out. Now there will be less money if it’s taxed a higher rate.

“Families shouldn’t be penalized for transferring ownership from one generation to the next,” says Crosby. “And under this proposal, we would incur twice as much tax and risk because we would be paying my father off over [a longer period of] time … if it was going to take five years, it’s now going to take 10. It’s going to take twice as long, cost twice as much.”

RELATED: Crosby’s Sticky Business

The Crosby family has been in the molasses business since 1879, when Lorenzo George Crosby began transporting fish and lumber from Yarmouth, Nova Scotia, to the West Indies and coming back with casks of molasses.

For more than 135 years, successive generations of the family have continued to grow the business, which was relocated to Saint John in 1897. The company sells molasses and sweeteners to consumers and food manufacturers around the world. It also has a line of dry and liquid sugar-based products and helps co-manufacture products for top retail brands.

Crosby’s employees in 1911. (Image: Crosby’s web site)

The company employs around 75 people full-time. This summer, that number hit 100 for a time because they had to fill a large order for a food manufacturer supplying Costco.

Crosby is proud of this growth and the family legacy; he would be part of the fifth generation of the family to own and operate the company. But he says his father would be better off financially if he sold the company to a multinational if the proposed tax changes are adopted. He would get all of his money right away along with the capital gains exemption on $835,000 of the sale price. He would also face less risk by selling it right away, rather than having to wait 10 years for his sons to buy him out.

It’s promoting the wrong kind of behaviour,” he says. “What you’re going to see is small businesses like ourselves [realizing] it’s way more beneficial for us to sell our business, and businesses being sold to publicly traded companies or foreign entities is not good for the Canadian economy.

“We’re committed to our community, we’re committed to our employees, and we want to be here. But the government is making the alternative way more attractive from a tax standpoint. They should be encouraging businesses to transition from one generation to the next, not penalizing us.”

Crosby knows this is a consultation period on the proposed tax changes. But he said it’s having a chilling effect on businesses because owners don’t know what changes, if any, will ultimately be adopted.

A potentially higher tax rate on passive investment portfolios, for example, would affect growth plans.

“If all of a sudden, we can’t accumulate cash to save for future business expansion or to weather some hard times… that removes a lot of flexibility from our ability to operate,” says Crosby. “And at a time [when it’s] getting harder and harder to be competitive, this is just a kick to the gut.”

He cites Crosby’s most recent expansion as the product of a company that was on sure footing and felt comfortable making such a large investment in its future growth.

Right now, all plans are on hold until they see what transpires after the deadline for the consultation period in early October. He wouldn’t be surprised if other businesses are in the same wait-and-see mode.

“We were able to create 25 new full-time jobs with [the most recent] expansion, and now we’re faced with uncertainty,” he says. “And when business owners are faced with uncertainty, they stop investing, they stop spending, they stop donating money to charity and supporting the community. You need some certainty and some confidence, not these tax grabs.”

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