How Bill Morneau found himself at war with small business - Macleans.ca
 

How Bill Morneau found himself at war with small business

The finance minister’s call for tax feedback unleashes vocal pushback from incensed lobbyists and political opponents


 
Minister of Finance Bill Morneau in Ottawa, on Friday, Nov. 20, 2015. THE CANADIAN PRESS/Adrian Wyld

Minister of Finance Bill Morneau in Ottawa, on Friday, Nov. 20, 2015. THE CANADIAN PRESS/Adrian Wyld

Bill Morneau’s Twitter feed isn’t typically a place of high drama.

Nor is it usually a place of low drama—or any drama, for that matter.

Canada’s mild-mannered finance minister tends to use social media to document his public schedule (Aug. 18: “Proud to speak at tonight’s @epilepsytoronto Soiree. A fun night in support of a great cause.”) or to congratulate colleagues (Aug. 28: Way to go @GPTaylorMRD! It has been amazing having you on team Finance and I can’t wait to see what you accomplish as Minister of Health!).

But earlier this week, before feting Ginette Petitpas Taylor’s promotion, Morneau unleashed a tweet-storm unlike anything the followers of @Bill_Morneau had ever seen. At about midday Ottawa time on Monday, the finance minister’s account exploded with an eight-point response to the increasingly hysterical opponents of his bid to curb aggressive tax planning.

“The rules are designed to help businesses grow — not shelter personal income from tax,” Morneau said in tweet No. 1. “Canadians deserve #TaxFairness.”

To review, back on July 18, Morneau said he was considering closing three tax “loopholes” available to smaller companies, but closed to the rest of us. It was probably the first time that most salaried Canadians heard about “income sprinkling,” a perfectly legal scheme that allows owners of a business to allocate income to family members, and thus reducing his or her tax bill. The tax code also permits the owners of a corporation, however small, to use his or her company to shelter income from passive investments, and to convert surplus revenue into capital gains, which are taxed at lower rates than income.

READ MORE: Everything you need to know about the Liberals’ proposed small business tax reforms

None of these things jibe with Prime Minister Justin Trudeau’s idea of a just society. But Morneau resisted acting unilaterally. He said he would listen to suggestions for 75 days, implying a deadline of Oct. 2. That means the government could still change its mind and decide there is a societal benefit to allowing an incorporated consultant to dodge taxes by shifting some of his or her income to his or her teenaged children.

It took some time, but the small-business lobby has decided to go to war over the proposed changes. The Canadian Federation of Independent Business is on its way to dislodging the Dairy Farmers of Canada as the leading champion of special-interest entitlement. “What has upset business owners more than anything are the comparisons made between the income of small business owners and that of employees,” Dan Kelly, the federation’s president, said in an op-ed published at the Huffington Post on Aug. 25. Elsewhere, Conservatives are calling Morneau’s proposals a “tax grab,” and doctors are warning of diminished health care. An engineer named Bonnie Swift says the proposals are “sexist” because they will make it harder for women entrepreneurs to have families.

Absent from the backlash is any suggestion of how the government might otherwise achieve its goal of erasing some of the more egregious examples of privilege from federal policy. Also missing is any recognition that the tax system should be as neutral as possible. The decision to start a company should be made on the merits of the enterprise, not whether there are financial gains to be had by gaming the tax code. Third, a lot of the criticism relies on sentiment, which is poor way to make policy. The small-business lobby wants us to separate risk-taking entrepreneurs from the salaried class. But as Andrew Coyne argued recently in the National Post, the barista who pulls shots while studying for his or her PhD is no less a risk-taker than the one who decides to open his or her own coffee shop. The entrepreneur already benefits from a significantly lower rate of taxation than larger companies pay. That’s advantage enough.

Still, there must be some unease in Ottawa. Morneau’s sudden Twitter flurry suggests the Trudeau government is worried that it is losing a winnable debate. That’s because it forgot that the easiest way to take something away from someone is to offer something else in return.

Coyne noted that Morneau did little to address the root of the problem, which is the wide gap between the small-business tax rate and individual rates. Narrow that gap, and there would be a lot less dodging. If that’s too much, cut the tax paid by fast-growing companies, which are the ones outfits such as the International Monetary Fund say are deserving of special treatment. An offer of that sort would make it more difficult to say the Trudeau government only is looking to raise more money.

Morneau’s tweet barrage included some sweeteners. He stressed that his policy suggestions wouldn’t increase taxes, and he appeared to give a guarantee that entrepreneurs would continue to receive special treatment. “We have the lowest #smallbiz tax in the #G7 and we’re keeping it that way,” Morneau wrote. He also said the any family member who did legitimate work for the company would be unaffected, as would companies that use their profits to invest in equipment, research and additional employees.

That should be enough. But to the apparent surprise of the Trudeau government, and, frankly, to some of us who pay attention to these things, the opposition and the business lobby have decided to take a stand over a business owner’s right to squeeze as much as he or she can from the tax system. Everyone loves the idea of fighting income inequality. But Morneau is discovering that many of the people he’s marked as lucky enough to be able to give back don’t consider themselves so fortunate. It probably won’t be a fight he can win on Twitter.

MORE ABOUT BILL MORNEAU:


 

How Bill Morneau found himself at war with small business

  1. A doctor who works shifts at a hospital or walk in clinic owned by someone else is NOT a small business. They directly employ ZERO people. They have ZERO risk of going out of business. They have to spend ZERO dollars on marketing and advertising. They have zero overhead. They bill the public purse for hundreds of thousands and bargain collectively like a union. They have enormous unfair advantages over average Canadians. Every argument they have for maintaining their tax status fails. If you are a highly educated professional in the private sector in the same bracket as a doctor, you are paying about 30-40% more in income tax and you don’t have a pension either. Doctors don’t pump their tax sheltered money back into business capital or hiring people, they use it to invest tax free, buy and lease real estate and automobiles, spread phony money to their kids and spouses, and take tax free vacations by calling them conferences and charging it to their shell corporation. Total SCAM!

    • John Ramsey Tell us again when you need someone to help you when you are on death’s door.

  2. Morneau has done nothing about big business tax avoidance….about how they load up with debt to create bogus interest expenses to reduce taxation. And use that borrowed money to buyback shares to convert corporate income to capital gains.

    Morneau has done nothing about family trusts, like Trudeau’s, which allows 1%’ers to protect family wealth and pay lower rates of taxation.

    Morneau has done nothing about capital gains on million dollar homes, which primarily benefit the 1%,

    What Trudeau and Morneau do is take direct aim at the dynamic part of the economy, small business.

    • WHYSHOULDISELLYOURWHEAT Nice comment, too bad it will go over their head. Ever notice that little justin is learning trump’s approach of helping out his rich buddies and screwing the economy?

  3. Both the writer of this article and the commenters demonstrate zero knowledge of business or risk. Typical entitled, victim whiners who expect jobs to be provided to them as ‘hard-working Canadians’ and begrudge that there should actually be a some kind of trade-off for the risk and contribution entrepreneurs and business owners make to the fundamental economy of this country. Stop blaming others who actually have ambition and take responsibility for themselves for your loser mindset. The majority of small business owners make less than you would ‘accept’ on an hourly basis because they are planning for their own futures instead of bitching and moaning that they’re being taken advantage of by those who remarkably have the gall to look after themselves. Shut up and grow a spine instead of trying to presume the ‘gaming’ of maybe 1% extends to the 99% who give your lazy ass a job.

    • Nice demonstration of the low level of the rationale for these tax loopholes.

      The reward for starting your own business is found in the success of that business not in tax shelters and loopholes not available to others. As a small businessman myself I certainly didn’t start the business for tax reasons.

      Also, as a single businessman I’ve yet to here why some should be able to sprinkle income to family members while I have no family members. What does the ability to “sprinkle income” have to do with business and risk taking? Nothing. It’s dependent on how many kids you have and if your wife has a lower income than you.

    • I ran a small business for over 30 years. The tax system only works if its fair. Employees get their tax deducted at source, no choice, no deductions. Business, of any size, is catered to by the tax rules. Well Itz, there ARE trade-offs. And BTW, pity the person who has to work for you, though I think you’re all hat and no cattle. Just a few of dozens of those trade-offs. Countless ways that the rules can be bent to the owner’s advantage. Taxes can be minimized and delayed. The EI system subsidizes seasonal industries. Health care is supplied by the state, not employers. CPP pays a perfectly inadequate pension to your employees and you don’t get blamed. Paying the same tax when you get to that bottom line of the tax return is not apocalyptic. Its hard not to notice that many of the same folks howling loudly are equally opposed to a decent minimum wage. Not a word here about broader measures for tax fairness. The contempt for wage earners is pervasive. Maybe they should start paying what you pay.

      • Bill Armstrong You have blinders on, somebody who risks his but by starting a small business needs some compensation. There are many inequities in our tax system read
        WHYSHOULDISELLYOURWHEAT’s post. Maybe a fanatical liberal fan?

  4. Good old liberals, if you can do the inappropriate thing, justin’s gang will do it.

  5. The sad situation facing the Trudeau liberals is that they have spent their way into a financial crisis. Now desperate for money to cover their reckless and irresponsible spending they are hoping that small business owners will be an easy mark, one which will have the minimal political impact.

    Of the proposed changes those involving Capital Gains and business “passive income” will be the most devastating. Allow me to explain…
    As a business makes profits and grows it becomes more valuable to its shareholders. This is true for those businesses that have their shares traded on the stock exchanges as well as the CCPCs. Sell the shares at a price greater than what you paid when you first purchased them and you have a Capital Gain. The Capital Gain laws are structured in such a way as to encourage people to invest in businesses and create economic activity (which includes the creation of jobs). Currently there is no difference in how the shares of publically traded companies and the CCPCs are treated, and this is fair. But the Trudeau liberals now want to change the rules so that the shares of the CCPCs are treated differently, and in turn taxed at a much higher rate. Consequently Canada’s small business owners would be more heavily taxed than those people that simply invest their savings into a mutual fund. The encouragement to create and grow a small business is destroyed, and reduced job creation will be one of the costs that we shall all pay.

    The changes about “passive income” are almost as bad. Virtually all businesses have a “cycle”, meaning that over the course of a year there will some months with a greater amount of activity and other months with less (i.e. just think of retail and what happens in December). Businesses need to have enough cash on hand to self finance for those busy months and so prefer to not pay out dividends that leave them cash short. Instead during the slow months the business has a cash surplus which it should invest in something that will pay a return (such as a government treasury bill or a bank guaranteed investment certificate). These investments are not part of the business usual operations and thus any return on these investments is considered “passive income”. But in a highly competitive world even a small return on these short term investments can make a “material difference” in the success (or failure) of the business. Although the cash remains in the business the Trudeau liberals see this as a form of investment income done on behalf of the shareholders, and want to take the full tax amount on the return on these investment now (and not wait until dividends are paid). This will result in some of the profits of the business being taxed at the lower Business Income Tax Rates, and some being taxed at the higher Personal Income Tax Rates. This in turn creates a logistical nightmare for the Accountants that will now be required to keep track of all this mess, because when dividends are eventually paid to the shareholders there will be a requirement to state how much of the dividend is from “active income” and how much is from “passive income” and the corresponding differences in the Dividend Gross Up and Dividend Tax Credit amounts.

    All this because the Trudeau liberals are like irresponsible children who have been let loose in the candy store. Unable to control themselves they have spent money that Canada does not have, and are now desperate to find a politically passable solution to the financial mess they have created.

    • ALLAN PEARSON Right on, however, the liberals believe the population is as stupid as they are and would not notice. The urban legion that small business is making out like bandits is crap, just start a small business and see what happens to you.
      Only the idiots of this liberal government (and the trump republicans) come up with this kind of scheme.

    • Passive investments (rainy day funds), as ALLAN PEARSON points out, can serve as important stabilizers during tough economic times. Now, the tax fairness crowd is rushing to shut these down after being in place for over 40 years. If implemented, small firms will have no incentive to build up savings within the corporation. We deserve a compelling reason beyond the tax fairness mantra as to why eliminating the incentive to build rainy day funds is a good idea.

  6. I run a small business and I’ve been following this story for some time, over the last few weeks there’s one thing in particular that I find interesting. There are only three groups of people that I can find who think these enormous tax increases are a good idea and they are as follows:
    1. People in government who will benefit from small business owners bailing out the Liberals spending binge – don’t get me wrong I’m not a conservative stooge, I’m pretty much a liberal by the classic definition – but calling the Liberals spending spree anything but irresponsible is just inaccurate.
    2. Academics like the author of this article Mr. Carmichael, many of whom have likely never worked outside of the hallowed cold stone halls of Canada’s universities, and would never think about the horror of slumming it working with a small business or, heaven forbid, starting a business of their own and employing someone.
    3. The envious and entitled class warfare set that usually finds a comfortable home in Canada’s NDP, but has had a warmer embrace from Canada’s Liberals of late than they could have ever expected.

    I’d ask everyone who hasn’t had the opportunity to talk to a small business owner about these changes to please do so. As small business owners many of us went through the first hard years making little or no money for our labour, with the hopes that some day we might be able to make some money on the back end if we could ever make it through the hard times. Now Mr. Morneau is doing everything he can to make sure that the dreams of small business owners are snuffed out so that maybe he can spend some more money on the CBC or some other Liberal pet project.

  7. Kevin, I have a response with respect to your concern that “Absent from the backlash is any suggestion of how the government might otherwise achieve its goal of erasing some of the more egregious examples of privilege from federal policy.”

    Before raiding the rainy day funds (passive investments) of active small businesses, the Minister should first tackle foreign tax evasion and money laundering that is a huge problem in the real estate sector in Vancouver and elsewhere. Once he has shown he can get the #VanRe situation under control, then maybe take another stab at small business tax reform. Approach it symmetrically. Close down clear abuses and items that bestow privilege, and pass the savings along broadly via the tax system.

  8. I think people criticising the government’s objective for tax fairness in this regard are deliberately or by ignorance equating or confusing small business with the incorporation of the self employed for the purpose only of tax sprinkling, avoidance, or deferral. The self employed, typically professional, that I know who are incorporated have done so only for these reasons, and the nature of their endeavours can in no way be described as “small business”. They are essentially contract employees for various clients.