The Portage Rotary luncheon yesterday sparked a lot of discussion and concern among Rotarians about the proposed tax changes to be made by the federal government.

BDO Tax Partner Shawn Friesen made the presentation, and notes he understands an element of fairness in the Liberals' intentions.

"People were using corporations to split income with people that were, for instance, young and going to university," says Friesen. "Essentially, you'd use these kids' tax brackets and they wouldn't pay any tax. And I understand the logic to restrict that ability, because that's not available to the local taxpayer. The ability to use capital against exemption for a minor, a three-year-old, or even a child in utero, could in theory utilize the capital gains exemption on a sale of shares. That seems a little dodgy. So, I understand why they're trying to tighten that sort of thing up."

However, Friesen notes, the plan undermines the tax policy in other ways.

He explains when you earn a dollar and pay your 50% tax rate, you're left with 50 cents. Friesen notes that works the same way whether you're a person or a corporation. In the end, you flow the money through to your person if you are using a corporation for it. But the government's proposing to tax the equity in the small business owner's corporation at much higher rates. This means you'll only have 27 cents left in your pocket instead of 50 cents.

"It's a complex set of rules, and it's kind of getting lost among a lot of the general public," Friesen continues, "because a lot of the hubbub's been on income splitting and how it's not fair. I can definitely see places where it's not as fair. But in terms of the integration, that's where I take the biggest offence. That's because you try to plan. You should not be any worse off or better off under typical business scenarios, where you're buying and selling, or just doing normal activity, or normal succession plans, that you should be this far off in terms of your overall amount of money into your pocket at the end of the day."

Friesen also explains another problematic implication is when you're a business in the province, and you're paying 10.5% tax rates on your active income you earn inside your corporation. If you invest that back into your business, you're able to do so. You have more money to pay off debt. You have 90 cents left on the dollar to pay off your debt. He notes you can invest that back into your business for more capital purchases, etc. But he says at some point, a business might generate too much equity, and they have excess capacity, and they invest it into a passive portfolio, like mutual funds or investments.

"In that scenario," Friesen points out, "you have 89.5 cents left to invest in your capital inside the corporation versus the taxpayer with 50 cents. There's a deferral difference there that they deem unfair. But what they're not really taking into account is that you're still paying the same amount of tax on that in the inevitable withdrawal of that cash outside the corporation. You're going to pay top dollar on it, anyway. At the end of the day you're left with 50 cents. But what they want to do is take away a refundable portion of the tax that you pay inside the corporation that you get back when you draw it out personally. And instead, you have a flat rate 50 cents. So, on a dollar of income, you pay your 50 cents taxes, and you have 50 cents left in your corporation to take out. Then you pay your top tax rate on that 50 cents again -- 46%. That's how you get into the 73% tax rates. And that's what I think is unfair."

He notes there's an important note to make concerning farmers. Friesen says he's often heard how the changes will not impact farmers and their ability to gift the farm. He says that's true, so long as farmers qualify their shares of the family farm corporation or family farmland to the next generation. That can be done with land or corporate shares.

However, he says, "If they want money for that, the problem is, how does the purchaser finance that? In many cases it's by a family member. So, how does a purchaser family member finance the buy-out of mom and dad? Mom and dad might be altruistic and give away the family farm. Or they might want some money for their retirement, which is only fair. So now, son or daughter who sets up a company cannot use the company to buy-out mom and dad, even with farmland. Mom and dad would get the full rate of taxable income. They wouldn't be able to sell that farmland to a corporation tax-free. If mom and dad also want to get out, and sell the shares to the next generation, they're basically stuck paying the highest rate of tax. If they sold the shares of the corporation that owned nothing but farmland, they'd qualify for capital gains exemption. They can sell it tax-free, if they sell it to me, for example, as an unrelated party. But if they sell it to their child, they're paying a lot more tax. I don't think that's really right in promoting family and unity. Maybe the best person to run the business is a family member, and not an outside party from a different jurisdiction or country, etc."