Trudeau's small-business tax fight fits with his old inequality messaging - Macleans.ca
 

Trudeau’s small-business tax fight fits with his old inequality messaging

But the political battle will turn on framing the debate. Is it about a tax grab or tax fairness?


 
Canadian Prime Minister Justin Trudeau speaks at the St.Matthew's Day banquet in Hamburg, Germany Friday February 17, 2017. (Adrian Wyld/CP)

Canadian Prime Minister Justin Trudeau speaks at the St.Matthew’s Day banquet in Hamburg, Germany Friday February 17, 2017. (Adrian Wyld/CP)

There’s a school of thought around Parliament Hill that Prime Minister Justin Trudeau and Finance Minister Bill Morneau have stumbled unwittingly into the battle now raging over their proposal to seriously tighten up the rules on small-business taxation.

The assumption is that they couldn’t possibly have been so reckless as to invite the hurricane of opposition that’s grown to category five since Morneau put out his proposals, back in July, to restrict the tax advantages open to professionals and entrepreneurs who manage their finances through what’s called a Canadian Controlled Private Corporation (CCPC).

And it stands to reason that Trudeau and Morneau didn’t expect the ensuing debate to turn quite this intense. Still, there’s also recent history that strongly suggests Trudeau and his inner circle aren’t uncomfortable positioning themselves as bent on bringing the well-to-do down a notch or two.

Way back in the winter of 2014, when he was sketching the broad strokes of his agenda as the new leader of the then third-place Liberals, Trudeau spoke in Montréal about how pro-free market economic orthodoxy, put into policy by successive governments over the past few decades, was favouring the rich too much.

“The original promise of that agenda was that everyone would share in the prosperity that it creates. It hasn’t happened,” he said. “That’s not a political point. It’s a fact. And if we don’t fix that, the middle class will stop supporting a growth agenda.”

READ: Canada must get serious about income inequality. But how?

So, is Morneau’s controversial plan to reform small-business taxation a legitimate part of the fix Trudeau envisioned? The changes the finance minister floated in July are too complex, the final details too uncertain, for the answer to be simple.

He set out three aims, none of which small business owners were ever going to like: limiting their ability to “income sprinkle,” or split income with family members who are in a lower tax bracket; making it harder for them to reduce the tax on their business income by converting it to capital gains; and hiking the tax on income they reap from so-called “passive investments,” like bonds or mutual funds, held by their companies.

Controversy swirls around all three pillars. But the much higher tax rate on passive investments is, so far, generating the angriest outcry. Morneau’s justification, put very briefly, goes something like this. The tax advantages enjoyed by small firms are meant to encourage them to do business—especially to pour money back into the company itself—not to shelter retirement savings. Time to take away that unintended tax break, while leaving in place the advantages for actively investing in the enterprise.

The obvious question this raises is how small business owners are supposed to save for retirement. The government’s answer seems to be that if business owners find the new tax rules make saving inside their businesses unattractive, they can always pay themselves salaries, and save outside their companies in the same Registered Retirement Savings Plans and Tax-Free Savings Accounts available to individuals who earn salaries.

It’s a thought. The sticking point, though, is that combined RRSP and TFSA room isn’t unlimited—it maxes out at about $37,000 a year for an individual making about $150,000. And some small-business owners are now making and saving much, much more than that. But, Morneau claims, not that many. Of the 1.8 million CCPCs, he estimates only about 90,000 earn and passively invest so much that they stand to lose out under his proposal.

Thus, Morneau’s key claim is that he is only trying to squeeze more taxes out of a well-heeled minority of small-business owners, those who earn more than $150,000—the threshold above which RRSP and TFSA shelters can’t match the benefits they now enjoy under the small-business tax rules.

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

Morneau’s opponents scoff at his comparison between the circumstances of Canadians who earn paycheques with those who own businesses. “RRSPs are a terrible tool for small business people, and that’s why many don’t use them,” Ottawa MP Pierre Poilievre, newly minted Conservative leader Andrew Scheer’s pick as finance critic, said in an interview.

Poilievre said the main problem is that owners know they would have to pay tax to withdraw RRSP savings if they need cash in a hurry. “And businesses need to be able to withdraw their cash in savings on a moment’s notice, in the event that there’s a fire at the premises that’s not entirely insured. There’s a sickness among one of the leading members of the business. Or if you’re a farmer and your fields are flooded, or there’s a drought, you need that money now, and you can’t afford to pay RRSP penalties on it.”

This debate is highly technical. Tax experts are hashing over every nuance. In the political sphere, however, Poilievre’s way of framing it suggests the terms are simpler. Is this about a tax grab that will make it harder for all small business owners to put aside money, both to run their companies and save for themselves? Or is it, as Morneau says, about making a small minority of rich small-business owners pay their fare share of taxes?

Morneau has at least this key advantage: He has left plenty of room to adjust his tack over the next few weeks, as consultations on his summer proposals wrap up. “We are listening carefully to business owners, experts, and professionals to make sure we get it right,” said Dan Lauzon, his spokesman. “And we are open to making tweaks to ensure we fix the system properly.”

Strategic tweaks might matter a lot. But they’ll have to be only tweaks to avoid undermining the aim Trudeau set out way back when—to rebuild the Liberal brand around the broad theme of battling inequality. If they can sell this policy package that way, and don’t lose control of the narrative, his government will probably judge this a fight worth waging.


 

Trudeau’s small-business tax fight fits with his old inequality messaging

  1. God bless you Mr. Trudeau,

    These inequities have gone on too long – after thoroughly reviewing the changes it is pretty clear your government’s intention is for small business owners to withdraw their entire personal compensation and invest in the same tax sheltering vehicles like a tfsa that is available to all Canadians while paying their appropriate tax rate. If they max out these accounts than they are 1% and must be stoped form circumventing the tax code to avoid their fair share. The only adjustment that needs to be made to your policy is to honor your small business tax cut promise on the campaign to a lowering to 9% which would help all small business owners especially legitimate ones. The tax cut would help bring up the take home pay of those small business owners who were already in a middle income tax bracket before they used sprinkling and will pay more without the relief. Other than that thanks for making Canada great again without boasting about it like the leader of our Southern Neighbor.

    • The 9pct small business tax would be useless unless you have perfectly timed your business investment with your tax cycle.

      But you’d have to understand taxes (and actually read the policy) to understand that concept.

    • In fact I reread your comment and you are clueless about taxes.
      “Help bring home the take home pay ”

      Huh?????????????

  2. 99% of the people are stupid (im one of them) we are dumb we have no issue blowing 35k on a car but we refuse to instead take a chance and invest 25k and buy a cheaper car …then when the 1% risks thier money to make money we complain …\Now we got Princes Justin in power who says this is not right …the 99% should spend and the 1% will pay for it …just imagine a canada if 1% did nothing and 99% took a risk in life …unemployment would be almost zero..people would have jobs and money.this is not about inequity at all, Justin about to bankrupt canada he hoping the 1% pay for his inequity of intelligence

    • This goes beyond the TFSA, or RRSP. This is about having the tax-ability to look after yourself and the family at the expense of the rest of us. If it’s about really ‘investing in a small business’ – who’s going to stop doing that – unless there is no return (that happens too, it’s called a ‘loss’ – something else most unincorporated or ‘small-business owning’ Canadians can’t claim) or the dissolution papers are at the lawyers’ (his services – tax deductible too) office?

  3. Retained earnings, which is how the smallest of small businesses build capital to grow, and to build a capital cushion to withstand the down times of a business cycle or recession, is under assault by the passive income tax changes.

    This does NOT just impact the upper upper middle classes that Morneau and Trudeau and their media spinners talk about, it impact any and every small business that wants to grow.

    Small business growth is lumpy, they may have to retain earnings for several years before they can make their next step function investment in growth. But the passive income tax changes attack the ability to do that.

    This particular attack agriculture which is particularly capital intensive and to whether the fluctuations in business, and to invest in new machinery, require large retained earnings for the farm not to be beholden to banksters.

    The provisions may be being abused by some, but they are essential to many less well off businesses. They are proposing the wrong tool to deal with the problem they identified.

    • To the ordinary Joe it’s called ‘saving’. And outside the tax deferral instrument and tax free savings amounts allowed to all taxpayers (some of which would be those affected and entitled by ‘spread’ income) ‘retained earnings’ isn’t something they’re permitted to claim – and ‘defer’ taxes on.

  4. The doctors, lawyers, programmers, engineers et al are bringing their winter beaters or cheaper second cars to work these days?
    But it still might be a good idea for salaried, nurses, secretaries and janitors in the medical offices and hospitals, and the minimum wage contract workers to go down and check the doctor parking areas to see how well they are doing.
    Might be enlightening.
    Journalists needn’t bother. They wouldn’t get it.

    • Pity the poor professional or ‘small business owner’ who can’t find a winter ‘holiday’ (attached to a professional seminar or convention) to write-off at tax time.

  5. “The obvious question this raises is how small business owners are supposed to save for retirement.”

    Clearly, small business owners should have to save for retirement the same way the rest of us that have zero or limited pensions do – RRSPs and TFSAs.

    However, somehow the notion of saving for retirement is being conflated with the need for a business to have a cash reserve on hand for unexpected circumstances, which is a totally different animal. So, it’s really not obvious to me how the proposed changes prevent SMOs from a) having a reserve fund in their business, and b) not being able to save for retirement using RRSPs and TFSAs.

    AFAICT, the purpose of the proposed change is to prevent tax rules that are meant to benefit the business from benefiting the SMO personally in a way that is not available to the non-SMO – and that seems perfectly reasonable to me.

    Note that a reserve fund is supposed to be liquid, it’s not supposed to be invested in stocks or long term bonds which are subject to their own unexpected downturns. As such, any business investing in such securities is NOT trying to create a reserve fund, per se, but instead investing for the long term, e.g retirement. And, as I said above, AFAIAC, SMOs can save for retirement that same way the rest of us with zero or inadequate pensions do – RRSPs and TFSAs.

    Having said the above, the one legitimate complaint that SMOs could make is that RRSPs contributions cap out too soon (at about $25,000 for incomes of about $140,000, I believe). So, rather than whinging about not being able to continue to save for retirement in a manner not available to the rest of us, the SMO should, IMO, be lobbying for higher RRSP contribution limits.

    • Sigh – replace SMO with SBO in all places above. SBO = “small business owner”. Time for coffee.

  6. Canadian tax law isn’t fair – if you are one of the lucky ‘earners’ with a loophole to jump through. Those citizens require the rest of us to pay for their ‘tax savings’.

  7. This does have to do with fairness it is not because it is a big money maker at all, that is just he narrative of the Conservatives..

    Trudeau is not fabulously wealthy; Morneau may be but Harper has twice the wealth of Trudeau and many of the reporters who are always crying on and on about taxes also have far more wealth.

    Increasing income disparity is something the government has been concerned with and this is an attempt to address that. However the wealthy and influential can afford the PR and the lobbying which others can not.
    .
    It also helps that the truly fabulously wealthy run the Canadian media as their
    personal fiefdom, the Thomson’s of the Globe for whom the combined wealth of Trudeau and Morneau amounts to pocket change, the Rogers, and whatever right wing American hedge fund is now driving the Post into the ground, share a dislike of spending a cent on tax, or in evening the playing field.