The straight facts on Ottawa’s tax reform
Probably before the snow flies, the federal finance minister, Bill Morneau, will table a bill in Parliament that will take baby steps toward more fairness in our tax system.
The federal finance minister’s goal is to curb the use of incorporation as a taxshelter device. The vast majority of people who incorporate are among the top 5 per cent of Canadian income earners. The current widespread misuse of this device is a means by which everyday taxpayers subsidize the wealthy.
For Ottawa, the nub of the issue is the estimated $27 billion of surplus, or “passive,” funds accumulating in “professional medical corporations” and in incorporated small businesses. Those passive funds benefit from the low small-business tax rate, but contribute nothing to the business. They serve to enrich the incorporated professional or entrepreneur at the expense of other taxpayers.
Ottawa proposes to raise the tax rate on those passive funds. It also seeks to restrict the practice of “income sprinkling,” by which small-business owners spread the company’s income among relatives with lower tax rates, who often aren’t involved in the business.
Ending those practices is essential, for obvious social-justice reasons. But more important is what this protracted debate tells us about the difficulty in achieving even minor reforms. The debate has been marred by a proliferation of falsehoods akin to the disastrous Brexit and 2016 U.S. presidential campaigns.
In its tax-reform initiative, Ottawa stands accused by vested interests of attacking the middle class, doctors, farm owners and small business.
Powerful special-interest groups say these modest tax changes will kill smallbusiness job creation, prevent the transfer of family farms, and send overtaxed doctors fleeing to the U.S. Ottawa is also accused of springing these changes on those affected without warning.
Every one of those claims is a falsehood. Fortunately, more Canadians among the quiet majority favour Ottawa’s bid for tax fairness than oppose it. Despite that, Morneau’s concession Wednesday that “changes are going to be required” to his reforms, without describing them, suggests Morneau is withering under the baseless criticism.
Fact: The proposed changes will affect — only to a negligible degree — people making more than $150,000 a year. That’s not the middle class. Pre-tax income for average Canadians is $49,510.
Fact: Justin Trudeau gave the affected parties a heads-up two years ago, when his party campaigned on — and won an electoral mandate for — precisely the tax reform introduced back in April. In 2015, Trudeau told the CBC, “A large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes.
“We want to reward the people who are actually creating jobs,” Trudeau said.
Fact: Only about 60 per cent of doctors choose to incorporate, meaning four in 10 docs will not be affected by the reforms. And all docs will still be able to write off their operating and capital costs. The only change for doctors who practise in a private corporation is a higher tax rate on the surplus, or “passive,” funds accumulating in their corporations. Those funds, often invested in stocks and real estate, are currently taxed at the low small-business rate, though they contribute nothing to health care.
Fact: More than two-thirds of Canadian small-business owners earn less than $73,000, and will not be affected by the proposed tax reforms. And again, all small businesses can continue to write off legitimate business expenses.
Ottawa will continue to subsidize small business with the low smallbusiness tax rate, which costs Canadian taxpayers $3.6 billion a year in forgone revenues.
Ottawa alone also provides about 550 assistance programs for small business, including grants, lowinterest loans, tax refunds and credits, loan guarantees and wage subsidies. Those are matched by assistance from municipalities and every province and territory.
That is an inconvenient fact for the Canadian Federation of Independent Business (CFIB), the biggest small-biz lobby, which has come close to branding Morneau an anticapitalist.
Fact: Farm owners, who lately have backed off their initial objections to Morneau’s reforms, will continue to benefit from the $1-million Lifetime Capital Gains Exemption for transferring ownership of family farms.
For the past decade, leading economies have been cracking down on the use of exotic offshore tax havens. But we’ve learned from this summer’s protracted tax controversy that we have thousands of tax havens here at home, tucked inside medical practices, auto-repair shops, plumbing firms and other small businesses.
Fact: By 2016, Canada could boast more than 84,000 doctors. We now have a record 230 docs per 100,000 people, billing the government about $339,000 a year on average, or a total of $25.7 billion. Family physicians bill about $275,000 per year, specialty surgeons earn about $461,000.
Morneau is also being roasted by the mighty Canadian Medical Association (CMA) and some of its provincial counterparts. It’s worth noting that the CMA, no friend of Canadian medical patients, also fought the advent of Medicare in 1962 in Saskatchewan, and then tried to thwart Medicare’s 1966 national rollout.
The silence of the Canadian public in letting vested interests dominate this debate has been countered by a few voices of common sense.
Almost 500 doctors and med students have signed a petition urging Ottawa to press on with tax fairness. “We need adequate tax revenues to fund social programs such as affordable housing, pharmacare, social assistance, legal aid, and the healthcare system itself,” the petition states.
“These programs directly impact the health of our patients, and we believe it is important for us to contribute to their sustainability through an adequate tax base.”
And here’s Dennis Howlett, executive director of the five-year-old Canadians for Tax Fairness advocacy group, testifying last month on the reform issue to the federal House finance committee:
“It is not fair for business owners to be given extra subsidized retirement savings room (through passive investments) that their own staff and the average Canadian cannot access.”
And that’s not the most sobering point Howlett makes.
This summer’s skirmish over a minor change in tax law has sidelined issues of far greater concern. As Howlett puts it, “There are kids dying from bad water in Indigenous reserves while we debate whether or not the wealthy should get to keep unfair tax breaks.”
In a parliamentary democracy such as Canada, special interests routinely hijack the public agenda, abetted by a credulous news media and a timid silent majority. We pay a heavy price for that.
It is said that bad things happen when good people do nothing. It’s also true that corrosive problems go unattended when good people are distracted by specious issues such as this one. dolive@thestar.ca
More than two-thirds of Canadian small-business owners earn less than $73,000, and will not be affected by proposed tax reforms