Anger builds over tax proposals as Liberals caucus meets - Macleans.ca
 

Anger builds over tax proposals as Liberals caucus meets

Liberals gathering for annual caucus retreat prepare to voice concerns over tax plan raised by constituents during summer break


 
Finance Minister Bill Morneau makes an announcement on housing in Toronto Monday, October 3, 2016. (Nathan Denette/CP)

Finance Minister Bill Morneau makes an announcement on housing in Toronto Monday, October 3, 2016. (Nathan Denette/CP)

OTTAWA – Liberal backbenchers have been getting an earful this summer from small business owners outraged by the Trudeau government’s proposals to end what it calls “unfair tax advantages.”

And now they’re preparing to unleash the concerns of their constituents – and pressure Finance Minister Bill Morneau to adjust his plans accordingly – during the government’s summer caucus retreat next week in Kelowna, B.C.

“From what I’m hearing right now, the highest priority thing is to engage in a meaningful discussion of the proposed tax changes to Canadian-controlled, private corporations,” said Stephen Fuhr, who represents the riding that encompasses Kelowna.

“There are a whole host of people – i.e., the ones that are on the receiving end of the tax proposals – that are not happy … My job is to deliver their input or that message to my colleagues.”

Fuhr is far from alone.

“I think we’re all hearing from small business” about the planned tax changes, said Liberal caucus chair Francis Scarpaleggia, a Montreal MP.

“The small business people that I’m speaking to obviously would like to see some changes … I’ve told them that I’m going to take their concerns to Kelowna, for sure.”

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

The backlash from doctors, lawyers, accountants and other small business owners has been building since mid-July, when Morneau released a controversial, three-pronged plan aimed at closing tax loopholes used by a growing number of small businesses, creating what he called an “unfair playing field.”

One change would restrict the ability of business owners to lower their tax rate by sprinkling income to family members in lower tax brackets. Another would limit the use of private corporations to make passive investments in things like stocks or real estate.

A third would limit the ability to convert a corporation’s regular income into capital gains, which are typically taxed at a lower rate.

The government is allowing 75 days for consultation on the proposed changes, a period that ends Oct. 2. Backbenchers are hopeful that it means Morneau would be open to adjusting the plan in order to address the concerns.

“There is a genuine outrage among people who have made all their financial calculations and planning based upon a certain set of tax assumptions and are now seeing those tax assumptions challenged,” said Toronto MP John McKay.

“I don’t know at this stage how locked-in the government is on their proposals, but I do know there is significant outrage among a relatively influential group of people.”

Canada Revenue Agency

Those people would be “really irritated” if the consultation turns out to be strictly pro-forma, McKay added.

Winnipeg MP Robert-Falcon Ouellette said he’s heard loud complaints in his riding about the proposed changes, but has also received feedback from others who say it’s time for a more level playing field when it comes to taxes.

Ouellette, who represents one of Canada’s poorest ridings, supports his government’s plan and believes a system that enables people to divide their income up among family members in order to save on taxes is “inherently unfair.”

“How much income does one really need to earn in life in order to have a good life?” Ouellette asked.

“I think everyone has to contribute to help pay our taxes because these government services aren’t for free. They have a positive impact on the world around us.”

MORE: Inside Ottawa’s crackdown on small business tax loopholes

Still, if necessary, he believes Morneau will be open to changes, tweaks and suggestions.

Another Toronto MP, Rob Oliphant, says he’s heard from accountants who oppose the proposals and others who agree with Morneau that the loopholes need to be closed.

“We have to make sure that we have a fair tax system that people have confidence in. At the same time, I think it’s incumbent on us to make sure there’s no unintended consequences.”

On that score, Fuhr says he’s heard from some tax professionals that the restriction on passive investments could result in fewer small business owners investing in rental properties which could, in turn, exacerbate the existing shortage of affordable housing.

“It may have an adverse effect on the rental market and that’s something that we’ve already got an issue with so that’s something we may want to consider, for an example.”

Fuhr is hoping the government can find some middle ground that increases tax fairness but avoids unduly penalizing small business owners.

“I think there’s a mediated solution in there somewhere. I think, I hope.”

MORE ABOUT BILL MORNEAU:


 

Anger builds over tax proposals as Liberals caucus meets

  1. 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, thanks for that clear description of just another mess the Liberal Party of Canada is creating ….

  2. 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 special 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. People with multiple degrees struggle to get their MSc’s, MBA’s, PHd’s, etc and then they go to work for a corporation. They pay 45-50% in taxes, have no pensions and can’t incorporate so they can pay 10% like MD’s who bill the public purse. How is that fair compared to a sole proprietorship doctor that employs zero people and claims to be a small business? The USA has far higher corporate tax rates than Canada (38% vs 10%). If they pay personal income tax, most will be in the 40%+ bracket.

    • No argument from me.