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Lana Payne: A pair of debates worth having


Fairness shouldn’t be this hard. There are two debates raging in the country, both focusing on this idea of fairness and tackling inequality.

Lana Payne

The first is the incredible grassroots chorus calling for a $15 minimum wage in nearly every region of the country. Their activism has been met with some hard-fought success, in Alberta, Ontario, British Columbia and in some cities. They have a slew of economists supporting their efforts.
Although a number of reports have predicted jobs losses if the wage is increased, many of them relied on old conclusions and research, and they come from predictable sources like the Fraser Institute. Their predictions have been countered with economic studies which show little or no unemployment impact, but note many benefits to raising the minimum wage, including growing economic demand and less inequality.
The second debate circles around tax fairness.

And make no mistake, Canadians who want tax fairness need to start using their voices.

The loudest voices to counter Finance Minister Bill Morneau’s latest attempt to bring some fairness to the tax system are those who stand in opposition to his plans.

And in this case, as I wrote two weeks ago, some have been misrepresenting the real impact of the proposals, overreacting and overreaching. The government has said if there are unintended consequences from their proposals, they will be fixed.

Speaking with staff in MP offices fielding calls on the proposed changes, they tell me there is a good deal of misunderstanding about them.

Most of this is fuelled by the Conservative Opposition. Some of it is from business organizations and the tax industry.

The Conservatives’ own background research on the proposals indicates they are not telling the full truth, as Vice News has reported. But then in politics, spin is everything and truth is often in short supply.

The Conservatives are spectacularly overreaching. They know those impacted the most by the changes are profitable companies that park income in the company and withdraw it and put it in their own pockets, rather than investing it back into the company. Passive income used to hire and invest in the company will not be adversely impacted. They also know — or should — that the biggest beneficiaries of income splitting, another loophole the government wants to close, are the wealthy.

Incorporation was not designed to allow someone, such as an incorporated professional, to pay a lower income tax rate by splitting income with family members who don’t work in the business.

Kevin Milligan, an economist at the University of British Columbia, has done yeoman’s service on this issue of tax fairness. In a recent blog, he noted:

“The (government’s) reform aims to pull back on the tax advantage of incorporation. Incorporation is appropriate in many business circumstances, but the incorporation decision should be made on the business merits, not because of tax incentives. We as a society don’t have incorporation because we want to give people tax advantages. We don’t have incorporation as a back-door way to give family-based taxation to a subset of Canadians. We don’t have incorporation to provide a parking place to put your retirement portfolio. You can argue that family taxation and retirement savings are good things, but that’s not what a corporation is for. The role of a corporation is to facilitate productive investment to grow the economy and produce better jobs. Productive investment should be the focus, not loading tax savings into one particular way of organizing a business.”

According to the Department of Finance, there was $27 billion in passive income sitting inside Canadian controlled private corporations in 2015. Some of this is taxed properly under the current system, a lot is not.

In relation to the passive income situation, Milligan noted, “it would be very surprising if many low or middle earners are currently making use of what is for them an expensive and tax-inefficient location for their savings.”

One of the loopholes the government has recommended closing is income splitting to family members who don’t work in the business. This allows the high-income earner in a family to pay a lower tax rate by splitting his income with a family member with a lower or no tax rate.
A recent report by the Canadian Centre for Policy Alternatives (CCPA) found that of the 904,000 families receiving small business dividends, only about 47,000 families, or five per cent, benefit from the income splitting allowed under private incorporation rules. But the annual cost of the loophole to the federal government is $280 million, and another $110 million to the provinces.

This report concludes that the benefits of small business income splitting are concentrated amongst Canada’s richest and that the loophole is not used by the vast majority of families declaring small business income.

The CCPA also found that traditional small businesses, such as family-owned farms or restaurants, are 2.5 times less likely to benefit from the practice than incorporated professions.

In other words, this loophole does not help middle class families as those opposing the changes suggest. Instead, according to the CCPA, it is mainly a tool for the wealthy to avoid paying some taxes.

Delivering fairness and tackling inequality are not easy. Easy would be the status quo. Let’s not get cold feet now.

Lana Payne is the Atlantic director for Unifor. She can be reached by email at lanapaynenl@gmail.com. Twitter: @lanampayne Her column returns in two weeks.

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