Morneau standing firm on controversial tax plan

Says only status quo is being argued

There may be some tweaks here and there, but Finance Minister Bill Morneau says he has yet to hear an argument that might convince him to retreat on his proposed crackdown on tax avoidance through private corporations.

Morneau was in Vancouver on Tuesday to meet with small-business owners and speak to the media ahead of the Liberal caucus retreat in Kelowna, B.C., where MPs are expected to air concerns they’re hearing from constituents over the proposal. Doctors, farmers, small-business advocacy groups and many others have vigorously attacked Morneau’s plan.

But Morneau said the government was well aware there would be “strongly held points of view” on the planned changes. When asked if he had heard anything so far that might cause him to back down, he didn’t hesitate.

“No. What we’re hearing is arguments for the current system that we largely expected. We are also, though, hearing some technical issues that have been brought up by people in different aspects of our proposals that we’re listening to carefully.”

Morneau and Small Business Minister Bardish Chagger are also embarking on a “cross-Canada listening tour” to hear more feedback on the plan.

The government says its proposed measures are necessary because certain groups of high-earners are using private corporations to get tax advantages unavailable to others. Finance Canada data shows that over the past 15 years, as corporate tax rates have dropped and high-income personal tax rates have risen, the number of private corporations has dramatically spiked.

“We don’t want to be in a situation where there’s two classes of Canadians: one class that can incorporate, another class that can’t,” Morneau said.

The government’s plan would bring in new restrictions on splitting income among family members through a corporation, keeping investment income inside a corporation to take advantage of lower tax rates, and converting dividend income into capital gains.

Since the proposal was announced on July 18 for a 75-day consultation period, a heated debate has broken out. Professional associations and small-business groups have said the changes are overly complicated and unfairly punish small-business owners who take risks that salaried workers do not.

The Conservatives have taken up the dissenting cause, and are holding events to mobilize opposition to the proposal.

On Parliament Hill, newly minted finance critic Pierre Poilievre told reporters it’s Morneau who is creating two classes of taxpayers, and shared anecdotes of business owners who told him they will have to cut back on hiring and expanding if the changes go through.

But Poilievre then said he shares the goal of not allowing tax avoidance.

“I think that everyone should pay the same rate of tax on their income,” he said, claiming the government’s plan won’t achieve that.

“We believe that any small-business persons should be allowed to employ their family members to do legitimate work, and to compensate them in equity and in salary accordingly,” he said. “We think that’s fair.”

Yet this is exactly what the government also says it hopes to do. The proposal outlines a “reasonableness test” to ensure all family members named as shareholders in a private corporation have legitimately earned the dividends, rather than simply getting them for tax purposes.

Doctors would be badly hit by that change, as about two-thirds of them across Canada are now incorporated for tax reasons. Some provinces gave doctors the right to incorporate and sprinkle income among family members as a concession in fee negotiations, and doctors are now furious to see the federal government planning to remove that option.

Morneau recently met with medical associations to hear their concerns, but told reporters his mind hasn’t changed — even when it was brought up that provinces encouraged doctors to do this.

“They did talk to me about the fact that their compensation was negotiated with the provincial governments on the basis that you identified,” he said. “My response is that the tax code is not the way we should be deciding how to compensate people.”

If the change goes through, provinces will have to deal with angry doctors in future fee negotiations. But Morneau declined to elaborate on what provinces think of this tax change.

“I haven’t engaged with provincial governments on this subject,” he said.