National Post (Latest Edition) - - CANADA - Ter­ence cor­co­ran


On July 15, a beau­tif ul 26 C sum­mer day in Ot­tawa, Fi­nance Min­is­ter Bill Morneau an­nounced the Justin Trudeau gov­ern­ment’s plan to re­vamp tax rules for small busi­ness cor­po­ra­tions. The Lib­er­als say these cor­po­ra­tions — for­mally known as Cana­dian- Con­trolled Pri­vate Cor­po­ra­tions — take ad­van­tage of gi­ant tax loop­holes that Canada’s wealthy use to dodge bil­lions of dol­lars in taxes.

The loop­holes are com­pli­cated and Morneau’s pro­posed fixes are even more so. The min­is­ter al­lowed 75 days for ex­perts and users of CCPCs to as­sess the pro­posed changes. Some say the re­view pe­riod is too short, but it has been long enough for a groundswell of op­po­si­tion to build among tax lawyers, doc­tors, farm­ers, small busi­ness own­ers and others.

As the war against Morneau’s re­forms grows, it has been easy — even pop­u­lar — to por­tray crit­ics as loop­hole-seek­ing small busi­ness own­ers and greedy doc­tors and farm­ers try­ing to pay less tax than they should.

One colum­nist dis­mis­sively de­scribed the anti- re­form­ers as just a bunch of whin­ers who don’t want to “pay the same tax as others earn­ing the same or less in­come.” And a re­port last week on CBC’s The Na­tional im­plied that top in­come earn­ers pay “an ef­fec­tive tax rate of 50 per cent,” while an in­cor­po­rated small busi­ness owner pays a “much smaller” cor­po­rate tax rate of 15 per cent.

Such gross mis­rep­re­sen­ta­tions feed the class war­fare beast at the heart of the Lib­eral tax agenda. The CCPC re­forms may in­deed close tax ben­e­fits buried in the CCPC struc­ture, as Morneau be­lieves, but the prime ob­jec­tive is to push the i ncomes of more and more Cana­di­ans into top mar­ginal tax brack­ets.

In one sense, Morneau has trig­gered some­thing of a tax re­volt among the rich — it’s about time — but it’s a re­volt that will fail if wealth­ier Cana­di­ans and the Coali­tion for Small Busi­ness Tax Fair­ness con­tinue to claim they’re en­ti­tled to lower small busi­ness tax rates, in­come sprin­kling and the pas­sive in­vest­ment, cap­i­tal gains and div­i­dend dodg­ing gam­bits.

By fo­cus­ing on the de­tails of the re­forms, they are miss­ing the larger point and they will lose the long-run bat­tle as a re­sult.

The tax sys­tem for decades has been much like a Hol­ly­wood epic. Po­lit­i­cal su­per­heroes — mod­ern day Robin Hoods — move in on the rich, seize their prop­erty and di­rectly or in­di­rectly re­dis­tribute it to those with lower in­comes.

Why the rich and the not-sorich put up with this es­ca­lat­ing expropriation of in­come and wealth is some­thing of a mys­tery. Maybe it’s good old- fash­ioned Cana­dian guilt of be­ing suc­cess­ful. More broadly, most across the in­come spec­trum seem to ac­cept that it is good — and right — for gov­ern­ment to take a stag­ger­ing pro­por­tion of the in­comes of the so- called rich and that mar­ginal tax rates of 50 per cent and higher are some­how jus­ti­fied.

Trudeau ran a suc­cess­ful cam­paign on a tax- the- rich plat­form. Morneau wears his gov­ern­ment’s in­crease in the top mar­ginal fed­eral rate to 33 per cent on tax­able in­comes of more than $200,000 as a badge of hon­our.

T he open­ing wo r ds of Morneau’s state­ment an­nounc­ing the cor­po­rate tax re­forms were: “One of our gov­ern­ment’s first ac­tions was to cut taxes for the mid­dle class, and raise them on the rich­est one per cent.”

Morneau’s tax hike raised the top fed­eral- pro­vin­cial mar­ginal tax rate in On­tario to 53.5 per cent from 49.5 — in­creas­ing fed­eral rev­enue by $ 12 bil­lion over five years ( or so they hope). Over the past decade or so, the top rate in On­tario has in­creased by 16 per cent. Rates vary across the coun­try, but they now sit at 50 per cent or higher in six prov­inces.

No won­der users of pri­vate cor­po­ra­tions are ag­i­tated. If the top tax rate is more than 50 per cent and climb­ing, there’s a mas­sive in­cen­tive to try to avoid or de­lay pay­ment. You don’t even need to be a one- per- cen­ter to pay through the nose: The tax rate ex­ceeds 45 per cent at $ 150,000 in seven prov­inces, in­clud­ing Bri­tish Columbia, which this week an­nounced a new 16.8- per- cent rate that kicks in at $ 150,000, cre­at­ing a com­bined rate of 50 per cent.

The Morneau cor­po­rate tax ini­tia­tive is not about clos­ing loop­holes, or mak­ing the tax sys­tem more “fair,” as the min­is­ter likes to claim.

Its un­der­ly­ing ob­jec­tive is higher taxes on the rich — the top five per cent, the top one per cent and the top 0.1 per cent. Hav­ing raised the top mar­ginal rate as promised, the gov­ern­ment is now push- ing more Cana­di­ans into the top rate through the cor­po­rate re­forms. And there is more to come.

It’s these ever- higher mar­ginal tax rates that should be the foun­da­tion for the nascent tax re­volt by the rich, not the preser­va­tion of the spe­cial tax breaks and entitlements that dom­i­nate the cur­rent anti-Morneau ef­fort.

Dur­ing the 2015 elec­tion cam­paign, Trudeau laid the ground for the pri­vate cor­po­ra­tion re­forms an­nounced by Morneau. “A large per­cent­age of small busi­nesses are ac­tu­ally just ways for wealth­ier Cana­di­ans to save on their taxes, and we want to re­ward the peo­ple who are ac­tu­ally cre­at­ing jobs, and con­tribut­ing in con­crete ways,” he said in a 2015 CBC in­ter­view with Peter Mans­bridge.

When those com­ments hit the fan, Trudeau dou­bled down. “There are a num­ber of stud­ies out there. Some have shown up­wards of 50 per cent where it’s high- net- worth in­di­vid­u­als who in­cor­po­rate, pro­fes­sion­als for ex­am­ple, who ac­tu­ally use it to avoid pay­ing as high taxes as they oth­er­wise would.”

The stud­ies Trudeau re­ferred to are the work of a dozen or more in­come in­equal­ity and tax- the- rich ide­o­log­i­cal ac­tivists who have been stalking high- in­come Cana­di­ans for decades.

The key re­cent stud­ies ap­peared in the Cana­dian Tax Jour­nal un­der ed­i­tor Kevin Mil­li­gan, a Uni­ver­sity of Bri­tish Columbia pro­fes­sor who has writ­ten ex­ten­sively on in­come in­equal­ity. He also served as a mem­ber of the Eco­nomic Ad­vi­sory Coun­cil for the Lib­eral Party of Canada prior to the 2015 elec­tion, and pro­vided ad­vice dur­ing and af­ter the elec­tion. Along the way, Mil­li­gan pub­lished the work of others sup­port­ing ac­tion against the CCPC struc­ture.

One of the lead­ers of this move­ment is Neil Brooks, emer­i­tus pro­fes­sor of tax at York Uni­ver­sity’s Os­goode Hall Law School in Toronto. Brooks’ assaults on the wealthy stretch back 35 years, many of them in ca­hoots with left­ist jour­nal­ist Linda McQuaig. In 2010, they co- wrote The Trou­ble With Bil­lion­aires, which pro­posed a 60- per- cent tax rate on in­come of more than $ 500,000, and 70 per cent above $2.5 mil­lion.

Canada is al­most there on the first tar­get. Ap­par­ently, the evils of bil­lion­aires — they do n’ t de­serve th e mon e y, they’re bad for your health, they’re bad for democ­racy — can be neu­tral­ized by go­ing af­ter peo­ple mak­ing $500,000.

But why stop at 60 or 70 per cent? Em­manuel Saez, an econ­o­mist at the Uni­ver­sity of Cal­i­for­nia, Berke­ley, be­lieves top mar­ginal rates should go as high as 80 per cent.

Brooks is the co- au­thor of one of the stud­ies Trudeau would have been re­fer­ring to when he es­sen­tially called small busi­ness cor­po­ra­tions a tax scam. That 2014 study was ti­tled: Pierc­ing the Veil: Pri­vate Cor­po­ra­tions and the In­come of the Af­flu­ent. Among the coau­thors were other vet­er­ans within Canada’s class- war academia, in­clud­ing the Uni­ver­sity of Ot­tawa’s Michael Wolf­son and McMaster Uni­ver­sity’s Michael Veall.

The premise of their study is out­lined in an in­tro­duc­tion that be­gins with a pos­i­tive nod to the Oc­cupy move­ment’s at­tack on “the dis­pro­por­tion­ate share of in­come re­ceived by the top 1 per cent.” They then gen­u­flect to the high priest of in­come in­equal­ity, French econ­o­mist Thomas Piketty and his book, Cap­i­tal in the Twen­tyFirst Cen­tury, which they said “sparked con­cern that with­out sig­nif­i­cant public pol­icy in­ter­ven­tion, the trend to­ward in­creas­ing in­come in­equal­ity will con­tinue.”

Pierc­ing the Veil goes on to de­scribe how Canada’s pri­vate small- busi­ness cor­po­ra­tions ap­pear to be in­creas­ing in­come in­equal­ity by al­low­ing their own­ers, and a large por­tion of the top one per cent, to shel­ter in­come.

By crunch­ing data from CCPC tax fil­ings, the re­port’s au­thors claim to have found stashes of per­sonal in­come that are above and be­yond the in­comes re­ported on per­sonal tax re­turns. Af­ter count­ing the CCPC in­come, “the share of in­come of the top 1 per cent in­creased by about one quar­ter.” They also claim that the one per cent’s real share of the na­tional per­sonal in­come pie is grow­ing at a faster rate than pre­vi­ously thought.

Some­thing, they fi­nally con­clude, must be wrong with the sys­tem.

At this point, in 2014, no spe­cific claim was made that CCPC own­ers were dodg­ing taxes and not pay­ing their fair share. That comes a year later when Wolf­son and another aca­demic pro­duce what they call “a se­quel” to Pierc­ing the Veil.

In Pri­vate Com­pa­nies, Pro­fes­sion­als, and In­come Split­ting, they crunch through CCPC data and con­clude in­come split­ting — the dis­tri­bu­tion of money through these small busi­ness cor­po­ra­tions to spouses and rel­a­tives at lower than the top 50-per-cent mar­ginal tax rate — re­duces gov­ern­ment an­nual rev­enues by $500 mil­lion.

Put another way, Wolf­son said the ex­ist­ing tax pref­er­ences for CCPC own­ers es­sen­tially sends $500 mil­lion a year to “a se­lect group of mostly higher- in­come fam­i­lies where the ob­jec­tives of sup­port­ing wor­thy ob­jec­tives such as en­trepreneur­ship and job cre­ation are un­likely to be re­al­ized.”

That is, at best, an un­prov­able and ar­bi­trary state­ment. Who knows what mo­ti­vates the own­ers of CCPCs and those with whom they split in­comes? Maybe farm­ers, doc­tors and small- busi­ness own­ers — or even large busi­ness own­ers — pro­duce more wealth and grow their com­pa­nies so t hey have more in­come to dis­trib­ute to their f am­i­lies. Maybe their fam­ily mem­bers are also driven to cre­ate jobs and later take over the busi­ness.

In the tax- the- rich world view, peo­ple with money — es­pe­cially bil­lion­aires — are freeload­ing ma­nip­u­la­tors who squan­der their money in un­pro­duc­tive ac­tiv­ity and ac­cu­mu­late wealth at the ex­pense of the rest of soci- ety. Brooks’ view of the rich, as out­lined in his book with McQuaig, is no less damn­ing: "I’d bet more fraud takes place on any given night at the SkyDome than at all the wel­fare of­fices in On­tario.”

It is im­por­tant to dis­tin­guish such at­tacks on pri­vate cor­po­ra­tions from the crit­i­cisms of others. For in­stance, Jack Mintz, Pres­i­dent ’ s Fel­low of the School of Public Pol­icy at the Uni­ver­sity of Cal­gary, ar­gues the ex­ist­ing lower small busi­ness tax rate is in­deed a dis­tor­tion with un­in­tended con­se­quences, in­clud­ing the cre­ation of such cor­po­ra­tions to re­duce per­sonal tax li­a­bil­i­ties. It could also en­cour­age small busi­nesses to stay small to avoid higher cor­po­rate tax rates. The Mintz so­lu­tion, how­ever, is to elim­i­nate the small busi­ness de­duc­tion — or lower all cor­po­rate tax rates.

More rad­i­cally, the Fraser In­sti­tute pro­poses low­er­ing and flat­ten­ing tax rates, thereby re­mov­ing the need for rad­i­cal tax plan­ning and elim­i­nat­ing the in­cen­tive to avoid ex­tor­tion­ate tax rates.

The Lib­er­als’ cor­po­rate and per­sonal tax ini­tia­tives have no such ob­jec­tive. In­stead of lower tax rates on busi­ness and higher-in­come in­di­vid­u­als, it wants an ag­gres­sive tax col­lec­tion sys- tem that would move more peo­ple into top mar­ginal brack­ets and elim­i­nate their abil­ity to avoid such taxes.

The small busi­ness tax re­form is not the end of the tax- the- rich cam­paign. The Trudeau- Lib­eral elec­tion plat­form took aim at another Brook­sian fix­a­tion. “We will con­duct a re­view,” said the plat­form, “of all tax ex­pen­di­tures to tar­get tax loop­holes that par­tic­u­larly ben­e­fit Canada’s top one per cent.”

Last year, Brooks wrote The Case Against Bou­tique Tax Cred­its and Sim­i­lar Tax Ex­pen­di­tures, an out­line of his plan for re­form­ing hun­dreds of cred­its and pro­grams that al­low com­pa­nies and in­di­vid­u­als to do things with their money at lower or zero tax, such as char­i­ta­ble giv­ing, pen­sion sav­ings, sci­en­tific re­search, med­i­cal ex­penses, ed­u­ca­tion and cor­po­rate in­vest­ment.

Brooks con­cludes that much of these tax ex­pen­di­tures is a bur­den on the econ­omy. The to­tal cost to the fed­eral gov­ern­ment is said to ex­ceed $20 bil­lion. They “im­pair the le­git­i­macy of the tax sys­tem and hob­ble it in the pur­suit of its pri­mary func­tions,” which is ap­par­ently rais­ing rev­enue and re­dis­tribut­ing the in­comes of the rich.

Bil­lions could be saved if the ex­pen­di­tures were elim- inated. But what should the gov­ern­ment do with the sav­ings? Maxime Bernier, when run­ning for the Con­ser­va­tive lead­er­ship, pro­posed cut­ting tax ex­pen­di­tures and low­er­ing tax rates, in­clud­ing the top mar­ginal tax rate. Not Brooks. “The case for top rate re­duc­tion has been sub­stan­tially weak­ened with in­creased high- end in­come con­cen­tra­tion,” he said.

In other words, the rich are get­ting richer, pos­si­bly by us­ing tax ex­pen­di­tures. Brooks also ap­prov­ingly foot­notes another re­cent pa­per sup­port­ing a 65- per­cent top mar­ginal rate.

The promised Trudeau/ Morneau agenda for tax ex­pen­di­tures has yet to be de­vel­oped, but it seems likely it will fol­low the line sug­gested in their elec­tion plat­form of tar­get­ing “tax loop­holes that par­tic­u­larly ben­e­fit Canada’s top one per cent.”

The one per cent in­cludes tax­pay­ers earn­ing more than $225,000 a year. The top five per cent starts at around $150,000. These are the rich that the Trudeau gov­ern­ment is tar­get­ing with their rate in­crease, their pri­vate cor­po­ra­tion re­forms and their com­ing tax ex­pen­di­ture re­view.

It is time for the rich to re­volt.



Fi­nance Min­is­ter Bill Morneau , left, and Prime Min­is­ter Justin Trudeau have their eyes on hik­ing tax rates for high-in­come earn­ers.


Neil Brooks and jour­nal­ist Linda McQuaig, pic­tured, co-wrote The Trou­ble With Bil­lion­aires.


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