Tax fairness yes, but hands off my loopholes

How could anyone be opposed to tax fairness? Surely we can all agree everyone should pay their fair share, that there ought not to be systemic tax advantages available to some that are not available to others in comparable circumstances.

But what happens when the motherhood issue of fairness bumps up against another Canadian truism: Who wants to pay more taxes? Most of us look for ways to reduce what we pay, through legitimate deductions. Many of us hire experts to advise us, to ensure we’re not missing tax savings opportunities.

This is the rock and the hard place federal Finance Minister Bill Morneau finds himself caught between. Morneau’s finance department recently released proposed changes that would close loopholes that allow eligible professionals — doctors, dentists and other small-business owners — to reduce their tax burden.

In general, this makes sense. The tax system should not offer advantages to some citizens based solely on how their income is earned. But Morneau is finding that this particular ox has a lot to say before being gored. Chambers of commerce and small-business lobbies, doctors and dentists have all chimed in, arguing the changes place an unfair burden on professional business owners.

Some examples: Professionals can shift income from themselves to relatives or spouses with lower earnings — a practice known as “income sprinkling.” The gains from lower tax rates can be substantial. Salaried workers don’t have the same option. They can also hold money inside personal corporations (typically formed by affluent businesspeople), and see that taxed at a much lower level than if it was declared as income.

Critics of the changes say the loopholes are justified considering debt levels, pension planning and other factors particular to the sorts of professions in question. Advocates such as the group Canadians for Tax Fairness and the Broadbent Institute argue Morneau is on the right track, and that ideally we should all pay fair taxes based on what we earn, regardless of the source of the income.

Both are compelling arguments. We are inclined to think Morneau is on the right track philosophically, but he doesn’t have all the specifics right. Overall the changes seem too blunt an instrument that could cause more collateral damage than acceptable. Fortunately, the deal isn’t done. Finance officials will hold extensive consultations, and hopefully will be responsive to some, but not all, of the concerns raised.

It’s important to remember that the Trudeau government had tax fairness as a platform plank during the election campaign. So it can fairly be said the government has a mandate to reform the system. The problem is that fairness, like many things, is often in the eye of the beholder.