Tax code changes will prevent 'two classes of Canadians,' says Morneau - Macleans.ca
 

Tax code changes will prevent ‘two classes of Canadians,’ says Morneau

Morneau: Current system means business owners who incorporate pay lower taxes, while a second class of citizens have bigger tax bill


 
Federal Finance Minister Bill Morneau, centre, and Ontario Finance Minister Charles Sousa, left, attend a meeting of finance ministers in Vancouver, Monday, June 20, 2016. (Jonathan Hayward/CP)

Federal Finance Minister Bill Morneau, centre, and Ontario Finance Minister Charles Sousa, left, attend a meeting of finance ministers in Vancouver, Monday, June 20, 2016. (Jonathan Hayward/CP)

VANCOUVER – Federal Finance Minister Bill Morneau says income-tax reforms are needed because small business owners have an unfair advantage that could create two classes of Canadians for tax rates and retirement income.

He said the current system means business owners who incorporate their companies pay lower taxes while a second class of citizens ends up with a higher tax bill.

Proposed changes introduced in July would do away with “inappropriate” tax planning methods and deal with unintended consequences benefiting the “privileged few” whose numbers have grown significantly, Morneau said on Tuesday.

MORE: How Bill Morneau found himself at war with small business

“We’ve had a 300-per-cent increase in the incorporation of professionals in the last 15 years,” Morneau told reporters after meeting with small business owners in Vancouver as part of cross-Canada consultations.

Small business owners in Canada pay the lowest income tax of all G7 countries and that provides investment opportunities to fuel job creation, but loopholes in the current tax system aren’t sustainable, Morneau said.

Incentives such as “income sprinkling” unfairly allow business owners to reduce taxes by shifting some of their earnings to family members who don’t have to work in the company, he said.

“Now we have a situation where a single woman who has two children, aged 12 and 14, and has the same amount of income as a married woman who has children who are 19 and 20 can find herself in a higher tax rate. So we see no reason why that should be so.”

But entrepreneurs say current incentives allow them to take on the risks of opening their own companies and, unlike salaried and public-sector employees, they don’t have a guaranteed pension or employment insurance protection.

Morneau said so-called passive investment income rules that allow a small business to build up a fund are unfair because that’s being used as a retirement-planning vehicle to defer tax on significant amounts of cash while others must abide by the limits of registered retired savings plans.

MORE: Showdown over Trudeau’s tax reforms could dominate fall sitting

“If small businesses want to leave money in their business to potentially invest in the future of their business we understand and encourage that,” he said. “We just want to ensure that there’s no situation where they have a much, much better retirement income as a result of tax planning not available to other Canadians.”

Morneau also said he’s against small businesses converting regular income into capital gains and paying half the tax rate, so that provision would also be changed.

The consultation period on the tax changes will end on Oct. 2.

Conservative finance critic Pierre Poilievre called on Morneau to back down on the policy reforms.

“Prime Justin Trudeau and Finance Minister Bill Morneau are creating two classes of taxpayers,” he said in Ottawa.

“What minister Morneau is proposing is not solving a tax avoidance problem, it’s avoiding a revenue shortfall problem. Minister Morneau has spent the cupboard bare and he’s now looking to raise taxes on small businesses to pay for it.”

MORE: Morneau scrambles to calm MP jitters over new tax proposals

Poilievre said Morneau has not explained a planned reasonableness test to ensure small businesses are legitimately claiming the work of family members, and companies would be forced to spend time and money explaining themselves to bureaucrats.

“Family members regularly contribute to small businesses, to family farms and to other enterprises, and there’s nothing wrong with them being appropriately compensated for that work.”

However, Poilievre could not explain why professionals including doctors would need such an advantage, saying only that he doesn’t accept the government’s characterization of passive investment.

Doctors have been vehemently opposed to the proposed changes, and Morneau noted they negotiate agreements with provinces.

“My response is the tax code is not the way we should be deciding on how to compensate people,” Morneau said.


 
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Tax code changes will prevent ‘two classes of Canadians,’ says Morneau

  1. I voted for Trudeau in the last election because I found the Liberal platform to be a lot better than the Harper Conservatives. I will vote for Trudeau again in the 2019 election because he has proven on multiple occasions that he is not afraid to do the right thing even when it’s unpopular to do so. Doctors and Farmers are full of themselves playing caste politics advocating they should pay lower taxes because of their professions. You pay taxes based on the income you make not based on the profession you have or if you own your own business. People who try to dispute that don’t know the meaning of fairness and just blurt out their own analogies seeking preferential treatment. Doctors and other incorporated individuals lie through their teeth when they say they can’t afford to save for retirement, maternity leave or for their children’s education with the new tax changes. Every Canadian has access, the ability to set up and contribute to an RRSP, RESP and TFSA and guess what if your individual/family income already forces you to max out the caps on these accounts then SURPRISE you are effectively in the 1% and you are just shamelessly denying it. Farmers also already benefit from the rigged system of supply management and are now crying because they are losing their cherry on top of lower taxes well guess what the Federal Ice cream shop is closing and everyone needs to pay their fair share in taxes.