Like many entrepreneurs, Alastair Trower recently told his member of Parliament of his outrage about the proposed tax reforms, which are being billed as an attempt to ensure fairness in the tax system.

A veteran of the startup world, Trower heads Cove Business Development, a consulting company that helps Nova Scotian startups bring products to the market. He has added his voice to the chorus of entrepreneurs opposed to the federal government’s proposals — the consultation period for which ends Monday.

“The easiest thing in the world would be for me to shut my business and get a job in one of the three layers of government,” he said in a recent missive to his MP. “I won’t do that because I fundamentally believe that small businesses are the engine of the economy, the catalyst for change, and the required inspiration for the new and future contributors coming out of the education system.”

Trower is, of course, not alone among entrepreneurs who oppose the moves. David Campbell, a New Brunswick consultant and the region’s best economics writer, has tracked the response and say 95 per cent of the public commentary has opposed the reforms.

One question that needs to be answered is how much these changes in the tax system will affect the startups that Trower spoke on behalf of — the tech, cleantech, and biotech companies that can spend years commercializing technology before they’re profitable. It has been difficult to assess given that a) the rhetoric has got a tad heated, and b) the tax system is mind-numbingly complex.

Read David Campbell's Take on the Tax Reforms, Via Huddle.Today. 

According to tax experts, the proposed changes will affect startups in two main areas: how income on passive capital is taxed, and in seeking equity investment at the early stages.

“Even at a startup phase, these rules affect these companies,” David Steinberg, national tax lead for the private client group at EY in Toronto, said in an interview. “Many tech-type startup companies, when they start up they all believe they’re going to be success and they all spend a lot of time on their capital structure. The new rules on capital gains are going to affect them.”

For example, startups may find it more difficult to raise capital from family members under the new proposals. If family members invest in a company that is later sold, under the current rules they each can claim a capital gains exemption of as much as $800,000. However, the reforms may do away with this exemption, said Steinberg, which would make it less attractive for new companies to raise money from family members.

Steven Carr, president of the Halifax accountancy Sandhill Financial, added that the taxation of passive income could also impact young companies that commercialize technology. If a promising company raises a lot of capital to fund operations before it is cashflow positive, it will earn interest on that capital. Under the proposed reforms, that so-called passive interest would be subject to taxation.

“If I have an operating loss and I’ve been able to attract capital and I place that in an interest-bearing account, I pay tax on it,” said Carr, speaking as hypothetically as if he ran a startup. “Even though I’m operating at a loss, I have to pay that tax, which is going to shorten my runway.”

Both accountants expressed shock that the government would propose such drastic changes to the tax system with only 75 days of consultation. Steinberg, who’s been practising since 1986, said he has never seen such a backlash over tax changes.

“Their (the government’s) whole premise is that people are incorporating to take advantage of the low tax rates,” he said. But many businesses incorporate to limit liability, he said, and startups can only attract investment capital if they incorporate.

“It’s very clear that there is no technology company in Canada that incorporates just to take advantage of the tax system. It just doesn’t happen.”