What should you think when you suddenly find yourself squarely in the firing-squad crosshairs of the Canadian Chamber of Commerce, the Canadian Federation of Independent Business, the Canadian Medical Association, Doctors Nova Scotia, the Canadian Bar Association, the business-boosting press, retailers, restaurateurs, tax planners, even ad hockeries like the newly minted Nova Scotia Coalition for Small Business Tax Fairness (What dat?); and then, when you turn in the other direction hoping for respite, you smack into the rhetorical Gatling gun-bullets flying at you not just from the usual braying right-wing suspects in the federal Tory caucus benches and their bleating-business-hearts provincial Tory counterparts, but also from some of your own party’s supposedly loyal MPs and Liberal premiers; and then, while you’re desperately look for political cover, you discover even some on the left — whom you’d expected to support your tax reform proposals because they ideologically should — seem far more interested in poking around under the rocks of your own business portfolios, desperately seeking the self-interested reason you chose this reform over that reform…?
Well… Well, it seems to me when all that shocked-and-appalled noise is happening around you, you must be doing something right.
Let us pause and give a thought this morning for Bill Morneau, Canada’s beleaguered finance minister. On July 18, with only modest fanfare, Morneau announced a series of very modest tax reform proposals having to do with what are called Canadian-controlled private corporations (CCPCs). That started the clock ticking on a 75-day public consultation process that is scheduled to end today (Monday).
So what was the government attempting to do and why?
During the 2015 election campaign, the Liberals talked a good game on tax fairness and, in their first budget, they did raise the tax rate on the wealthiest Canadians. The problem was that didn’t generate anticipated extra revenue: wealthy Canadians simply began socking more of their income between the bedsheets of their CCPCs and used it to keep their taxes low. According to federal numbers, two-thirds of Canada’s richest .01 per cent have one — or more — CCPCs in which they can shelter their income from the taxes everyone else has to pay.
So the government came up with a second set of proposals to counter that wealthy tax planner counter-measure.
First, the government wants to stop company owners from “sprinkling” their income among spouses and children who, in reality, don’t actually work in the businesses at all, but whose presence on the payroll enables the owner to lower her or his overall tax burden. It was a good deal if you could get it. If you’re on salary like most Canadians, of course, you can’t. For the 50,000 or so who can and do, their sweet little deal cost government treasuries $500 million a year.
Another proposal calls for an end to rules allowing small business owners to stockpile after-tax cash inside their company, investing it “passively” in stocks and GICs instead of using it to expand or create jobs and spur the economy, as was originally intended. The result has been another way for the wealthy — according to Ottawa’s numbers you’d have to earn more than $150,000 a year to benefit from this passive investing provision — to lower their taxes in ways that are not available to ordinary folk.
Same goes for Ottawa’s third proposal: limiting business owners’ ability to convert regular income of a corporation into capital gains in order to lower their taxes even more.
Why the fuss?
Well, it isn’t because — as organizations claiming to represent small business owners and professionals like to whine — these changes will affect every small business everywhere, drive doctors out of the country and make jobs-creating investors pick up their Canadian stakes and stake them back down in Trumpland just to show us. And it certainly isn’t because Ottawa has decided to launch class warfare on the defenceless rich!
Some numbers. More than two-thirds of Canadian small businesses won’t be affected at all by these provisions since they don’t earn more than $75,000 a year; most changes won’t begin to bite until you pass $150,000 a year on your CCPC road to wealth. If you own a small business and you really employ your spouse or kids, you can keep on doing so. Seems fair. And Ottawa insists none of its proposals will be backdated, so professionals can keep whatever they’ve already saved inside their businesses though passive investment for their retirement. And let’s not forget farm owners. In the words of the finance minister: “Farm owners will continue to receive a lifetime capital gains exemption of up to $1-million for farm property, facilitating the transfer of their business to the next generation.”
OK, take a breath.
But, hey, here’s something else that isn’t changing (even if I think it should). Canada’s federal small business tax rate is the lowest in the G7. And provincial governments like our own — whether Liberal, Conservative, or NDP — have tripped over themselves for decades promising to make the rate even lower. So small business owners are hardly put-upon victims.
There may be a reasonable argument that the government did not do a good job selling these proposals, did not anticipate the orchestrated outrage over the finance minister’s use of the word “loophole.” Yes, these tax… er, advantages are completely legal, but that doesn’t make them fair or suggest they should continue unchanged.
Some of the government’s critics have even suggested the government has launched “class warfare” with its proposals. If trying, even in a small way, to redress the balance in our tax system is class warfare, then bring it on.
Without question, the tax system is out of whack. Thanks to business lobbyists and their politician water carriers, more and more of the tax burden has shifted over the past half century from the wealthy and from corporations and been dumped instead on salaried individual middle-class taxpayers who don’t have the luxury of tax planners and the use of private corporations. And now those same lobbyists and politicians are trying to stir Canadians to take to the trenches to fight for the rights of the well-heeled to be even better heeled. Talk about Fake News.
There is no doubt the Liberal proposals are only a baby step in the right direction — and there are lots of other ripe targets from reform — but we need to begin somewhere.
That somewhere should be letting your member of parliament, not to forget your chamber of commerce, know you support these changes — as a first step.
Some further reading:
- Dispelling the myths on closing private corporations tax loopholes
- At least 87 per cent of small biz families see no net benefit from income sprinkling
- The sky is falling on small businesses – or is it?
- Stephen Gordon: The Liberals can and should win this fight against the rich
- An Open Letter to Minister Morneau from more than 470 physicians and medical students
Two things frustrate me about the doctors right now. 1) They should be on salary and taxed at source identical to every other hospital employee and 2) they have used scarcity of services as a bargaining chip too long now, time to recognize those foreign trained surgeons and specialists who can only get employment here as scribes and patient sitters.
I completely agree with the proposed tax changes and the reasoning behind them. However, to the people who have been benefiting from the previous rules, they don’t feel like unfair advantages — they feel like rights that they have earned. Anyone who is accustomed to receiving these “rights” is obviously going to be angry and upset to have them taken away — it’s just human nature. And especially to have it now painted as something a little underhanded, when it was absolutely above-board all this time. Of course they are upset and defensive.
Given that this is an easily predictable reaction, I think the government went about announcing this entirely the wrong way. They shouldn’t have gone with “we’re going to close these unfair loopholes that rich people are abusing”. More like “as part of a much larger realignment of tax rules, these various rules (among others) are going to be changed, very very gradually”. Phase it in over a number of years so people know it’s coming and can plan and adjust (not sure if they’re already doing this). Offer benefits that might offset it, such as simplifying other areas of filing business taxes. Don’t say you’re only targeting the wealthy — I’ve read that most wealthy people don’t really feel “wealthy”, so that only leads to more resentment.
This doesn’t actually affect me at all. I just get frustrated when perfectly understandable human reactions are not foreseen.
Thank you for this piece.
It provided a good analysis of the facts and the reality of the situation.
All I can say is that for some of us if only we could begin to earn 50% of the minimum
that would be a good start!
aj
Sprinkling income to a spouse and/or children is not allowed unless the spouse/children have worked. This has been mentioned in many media reports and any journalist who writes on the subject should check the facts before typing.
Too many journalists have been fooled in parroting the Morneau/Butts BS, or push the truth way down the article.
The changes won’t affect Tim because he draws dividends rather than a wage, smart thinking Tim, and dividends incur less tax.
Income sprinkling just does not seem like good tax policy. It doesn’t even apply to single people, or people without kids or with young kids.
Would love to see breaks that actually work at the other end of the self-employed spectrum ($150,000 and down, even $75,000 and down!). Would also love to see more mechanisms for self-employed access to health insurance and pensions, as mentioned in the letter from the doctors and med students.
Oh, I’d also love to see more salaried doctors, by the way, but that’s a whole other kettle of fish.
I’m sitting with a surgeon who sees more patients and does more surgeries than that entire department of salaried equivalents at the VGH. Salaries are nice in theory and in specific circumstances but they’ve failed spectacularly in ways no one wants to talk about. There’s a reason we have comparatively more doctors but very long waits. Salaries are ideal for governments that want predictable health care costs and to limit patient access thereby slowing patient flow through the system and all the costs that entails. It was before my time but I’ve been told that’s why they went that route years ago.
While I don’t disagree with the specifics of the current proposals, it seems to me that the best way to proceed with tax reform would have been to avoid doing it piecemeal by trying to put together a comprehensive tax reform package, perhaps by just starting over at the beginning. This would certainly avoid all the fuss, and would allow the reform process to consider all the various interactions which are bound to be present in such a complex tax system. I know it would take longer to see anything concrete, but wouldn’t it result in something that everyone could feel better about (except those who are taking advantage of the rest of us).
those who argue for the status quo don’t even attempt to address the reality of what these tax breaks mean – thanks Stephen for presenting the facts and shedding more light on our unfair tax system – lets hope change is on the way and our federal government doesn’t back down!
Thank you Stephen. Well done. Finally some truth on this tiny move towards taxation justice.
Sorry but I don’t support the changes and will be reducing my clinics the moment they pass. I would rather live more modestly and retire with less than work harder to deal with an increased tax load. Lots of cheats to go after before changing the goal posts.
It would be great if you could be more specific as to how your tax load will increase so that I can decide if I should accept your concerns on not
The only one I’m concerned about is investing passively within the corporation. It allows me to save more faster for retirement. I pay the same tax on it when I pull it out but it lets me save more quickly with a lower initial tax. I don’t expect any sympathy. I lived 14 years as a university student, 7 years as a high earner. I’ll just go back to living more like the university student. I love my job but I’d rather work less and live frugally than more just to end up where I am now.
Do you believe employees at doctors’ clinics should have the same savings opportunity?
Offhand no. Most are employed out of high school, can easily change jobs, have nowhere near as much debt or years of training, have paid sick leave, EI, less responsibility as a business owner and professional and are in a much lower tax bracket where they keep a much greater % of their income. I’m not arguing the current system is fair or unfair but if it changes I’ll make every effort to end up in a lower tax bracket.