TAX STORM HAS PASSED
But damage has been done
The Trudeau government has weathered a Category 5 political storm over its small business tax changes, and the associated tempest over its finance minister’s personal assets, but it has left a mark.
The Liberals released new measures to combat income sprinkling in small businesses Wednesday — marginal changes affecting around 5,000 companies that exempt elderly spouses and adults who have worked in the business from the government’s “reasonableness” test to determine whether they should pay the highest marginal tax rate.
Income sprinkling was always the least controversial part of the small business tax package — few people would agree that professionals should be able to designate a child at university as a business owner for tax purposes.
But the Liberals chose the last sitting day of the fall session to drop what they hope is a book-end to the most troubled period of their time in government.
Nanos Research suggests Liberal support is almost back to where it was in the polls before the government launched its tax cheats campaign last summer — around 41 per cent. But in mid-October, when the controversy was dominating parliamentary debate, the Liberals fell to around 34.5 per cent support — minority government territory.
L’affaire de Morneau is not dead yet — the government still needs the money being squirrelled from the taxman by private corporations through passive investments, and it is working on ways to go after those billions.
However, the specific measures to limit tax deferral opportunities will be buried in the 2018 budget, and so less likely to kick up a stink. A smarter government would have interred the whole plan deep in the back of the budget’s tax annex in the first place.
In his wisdom, Bill Morneau chose to launch a public consultation into his proposed measures on income sprinkling, passive investment and lifetime capital gains last summer.
It allowed Morneau and Justin Trudeau to revive one of their campaign themes — that “the wealthy” were dodging paying taxes at the same rate as the rest of us. Under the cover of social justice and fairness, it allowed two rich guys to propose raising taxes on other rich guys and girls, thus endearing them to the envious left-of-centre voters they need to win the next election.
But the Liberals did not define which of the 1.8 million private corporations they intended to whack, creating a vacuum that the grateful Conservatives filled.
Andrew Scheer, and his finance critic, Pierre Poilievre, attempted to foment a national tax revolt by suggesting that convenience store owners and farmers would be hauled into the Canada Revenue Agency’s dragnet — always a remote prospect, given the fact that only 300,000 of those corporations report any kind of passive investment.
But by mid-October, it was apparent the opposition pressure was working when the government resurrected a campaign pledge that had been consigned to its broken promises graveyard — the commitment to cut the small business tax rate to nine per cent.
The tax cut may have bought off some small business owners, but it will cost the treasury $2.9 billion over six years — an amount equivalent to what the Liberals hoped to raise in the first place.
The $7,500 per small business tax cut was accompanied by news the government was ditching the proposal around the lifetime exemption on capital gains, which would have made it more expensive to pass family farms on to the next generation.
The Liberals may have hoped that policy capitulation would be the end of it but a series of revelations about the finance minister’s own assets kept the issue bubbling.
First, it emerged Morneau’s assets were not in a blind trust, as had been widely assumed, but that he had followed the advice of Ethics Commissioner Mary Dawson and set up a conflict of interest screen that still allowed him effective control over the $40 million in shares in his family firm, Morneau Shepell.
Second, questions were raised about the apparent conflict of interest over his role as regulator and shareholder in his sponsorship of Bill C-27. This legislation will increase use of target benefit pension plans, to the potential benefit of Morneau Shepell.
The opposition charged that this did not live up to Morneau’s mandate letter that called on him to uphold the highest standards when it came to his official duties.
Finally, he was accused of profiting from the sale of 680,000 shares in Morneau Shepell just days before he announced tax changes that caused share prices to fall across the board.
On three occasions the government’s agenda was derailed as a result of questionable decisions by the finance minister.
The takeaway for many was that a very rich man, who was taking advantage of tax loopholes to stay rich, was trying to close loopholes for people much less rich than himself.
Morneau has survived thus far, in part because it emerged he has donated around $10 million in proceeds from Morneau Shepell share sales to charity.
But the Liberals emerge much diminished from the fall.
Business no longer trusts this government and we could yet see a flight of capital as a result.
Bob Keats, an expert in cross-border financial planning at Keats Connelly, said tax rates of over 50 per cent are a mental tipping point for high net worth individuals.
He said many are upset at being vilified as tax cheats by the prime minister and his finance minister, while punitive new tax rates are driving a number south of the border, where taxes are set to fall.
“Since Trudeau was elected, I’ve had more calls than in the previous 20 years,” he said.
For voters, it laid bare a prime minister and finance minister who appeared for long periods to be disconnected from the lives of the middle-class they claimed to champion, at the helm of a government increasingly desperate for tax revenues to pay for its ambitious agenda.
The storm may have passed but it has left structural damage in its wake.
SINCE TRUDEAU WAS ELECTED, I’VE HAD MORE CALLS THAN IN THE PREVIOUS 20 YEARS.