Taking on the tax-reform criticisms

Those confused by the tax-reform proposals that have hijacked the political conversation over the last two months can be excused. They are profoundly confusing. That’s in part because the Trudeau government chose to start its tax-fairness push with a particularly abstruse set of reforms, but also because of the finance minister’s tone-deaf rollout and the overblown rhetoric that came in response.

While fashioned as closing small-business loopholes, the reforms have been most vociferously criticized by doctors, other professionals and farmers who have used incorporation as part of their tax planning. The government’s intent was to rein in some of the unintended benefits of incorporation, but critics say they’ve gone too far. The debate has become polarized between those who say the proposals are a disaster and those who say they’re fine as they are. Both sides are wrong. Many of the criticisms are in fact misplaced. But that shouldn’t blind us to the need for making important changes.

The first misplaced criticism is that, despite the Liberals’ rhetoric on the middle class, these measures actually hurt those the government purports to want to help.

Not so. The people affected are relatively rich; they just don’t realize how rich they are. Take the primary beneficiaries of income sprinkling, one of the practices now on the chopping block, which allows individuals to significantly reduce their tax burden by transferring portions of their income, through a corporation, to family members.

To benefit from this, families must be earning quite a lot. A recent report found 64 per cent of all benefits go to families with annual incomes of at least $168,000. Some of these people may feel they are middle class, but they earn more than twice what the median Canadian family does. The proposal to tax at a higher rate profits from so-called passive investments held in a private company – investments in mutual funds, say, rather than machinery – is unlikely to have much impact on the average mom-and-pop business.

This measure benefits only those who have already maxed out their other tax shelters, which means again it allows the relatively well-off to become more so, without doing much to help Canada’s small-business ecosystem.

A second criticism, harder to dismiss, is that smallbusiness owners, and incorporated professionals, are denied advantages typically associated with wage labour, such as extended health benefits, pensions and parental leave. Critics argue the measures Ottawa is looking to do away with compensate small-business owners for these differences.

But not all wage employees have pensions or benefits or parental leave, and the group that does have them is shrinking. And of those without such benefits, the cadre of critics opposing these reforms is, in general, among the least vulnerable. It’s not entirely true that small-business owners don’t have access to extended benefits. There are special retirement programs, though admittedly not ideal, available to incorporated professionals and special mechanisms for saving for parental and health leave.

None of that is to say that those affected by the reforms may not have legitimate concerns about pay and access to benefits. But if doctors are not paid enough, or if public pensions and employment insurance coverage are inadequate, these issues should be addressed directly, not through small-business tax measures. The overblown response to these proposals should not obscure that there are problems that need to be addressed.