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Tax Changes Likely to Create Unintended Fallout for Family Enterprises

Sep 06, 2017
Photo of Craig Alexander
Senior Vice-President and Chief Economist
Photo of Michael Bassett
Associate Director
Governance, Compliance and Risk

As many successful family-owned businesses get ready to pass the torch to a new generation of owners, how much do we know about the implications to Canada’s economy? The answer is: not enough.

Decisions that are made by business owners and their families, such as whether to sell to a non-family member, sell or transfer to the next generation, or close shop, have tremendous implications for our economy.

We know of many incredibly successful families whose entrepreneurship and drive have pushed their families and their companies to leading positions in Canada and the world. At the other end of the spectrum, we think of the mom-and-pop corner store. The reality is that there are many more family-owned enterprises that fall in the middle of the spectrum. These medium-sized companies provide jobs and are often a major driver of growth and innovation; we need to understand more about their impact on our economy if we are to maximize opportunities and mitigate risks.

However, there is no comprehensive and detailed picture of the role family enterprises play in our economy. No solid information exists on their contribution to GDP, jobs, or exports. The often-cited numbers in this area offer little explanation. This lack of information guarantees unintended consequences for family-owned firms.

The issue becomes even more concerning with recently proposed changes to the federal tax treatment of private corporations. While much of the discussion around the proposed changes has focused on backlash from high-income professionals who fear the anticipated impact to their financial outcomes, a potential silver lining is that it has opened up discussion around the role of taxation and regulation on the behaviour of business owners.

Succession decisions can either create wealth and economic opportunity or destroy it. Ownership can either stay within the founding family or move outside of it. As a country, we should have a clear view of how the succession of thousands of businesses and millions of dollars affects our economy—but we don’t. All levels of government need to recognize this information gap.

In parallel to this, all levels of government have recently recognized that we need much better information about labour markets. The Labour Market Information Council was created in 2015 with a mandate to improve the timeliness, reliability, and accessibility of labour market information to facilitate decisions made by students, workers, job seekers, employers, and policy-makers. The council was formed because of a recognized gap in the current information as it relates to employees. A greater gap still exists in information about business owners—and family enterprises in particular.

What we do know about family-owned enterprises is that these businesses can provide longevity, security, and profitability that help drive economic success. We also know that the journey to transition these businesses is challenging in the best of times. Tax specialists have already identified that Canada’s tax laws provide preferential tax treatment for sale to individuals outside of the family rather than supporting intergenerational transfer.

The full extent of economic interactions and repercussions are complex. In physics, Newton’s third law states that every action has an equal and opposite reaction. In economics, this often manifests in the form of the law of unintended consequences. Changes in regulation or taxation often have significant unforeseen impacts. Throughout history, there are many examples where efforts to increase taxation resulted in less revenue than anticipated as people and businesses changed their behaviour to avoid the new status quo.

The risk of unintended consequences can be most severe when the government has little information about a sector of the economy. The lack of information about family-owned enterprises puts these organizations at significant risk for unintentional harm—to the firms and to the Canadian economy. As a country, we should have a clearer view of the effects of the succession of thousands of businesses and millions of dollars.

The Conference Board of Canada is embarking on a major research study to shed a light on the importance of family-owned enterprises to the country and to begin to address this gap in understanding about our economy. From the smallest businesses to the largest companies, we need to have solid information on the role of family enterprises to our economy and society.

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