Ask federal Finance Minister Bill Morneau. He has been trying.
His first attempt last year failed after stock-option rich CEOs came pounding on his door threatening all kinds of dire economic backlash if he didn’t climb down from a proposal to tax stock options like income rather than the preferential treatment they currently get. Morneau gave in. Rich CEOs kept their lucrative tax breaks.
His latest proposals — relatively minor changes compared to some of the big loopholes that need plugging — have been greeted with the usual “the sky will fall” arguments from those who stand to have to pay their fair share of taxes like the rest of us.
It’s a consultation. Make your arguments, but my advice, make good arguments rather than the complete overreaction, misinformation and hysteria we have been seeing from some corners. Overreach like: doctors will leave the country. Small businesses will collapse if they don’t get these extra special and very generous tax breaks on top of their already reduced tax rates and write-offs.
They are noisy and aggressive with their lobbying. But folks, take it from someone who has lobbied a time or two, stick to the facts. If these changes will for some reason negatively impact a real business rather than an incorporated professional looking to pay less tax, show the government how. That’s what consultations are for. And likely — especially given the people doing the screaming are pretty affluent — the government will eventually listen and the proposed changes will be modified.
Personally, I think the government needs to stick to its plan.
This summer the federal government released a consultation paper dealing with Canadian-controlled private corporations (CCPCs). The tax reforms were also promised in their election platform.
Here’s what the government wants to do and why.
More and more high-income earners have been availing of the loopholes by incorporating in order to reduce what they pay in income tax. The number of CCPCs held by these high-income earners has tripled over the past 15 years, many of them doctors. It’s legal, as Morneau has said, but it isn’t right or fair.
“As more and more people set up corporations, there is a growing number of individuals who have access to tax advantages not available to other hard-working Canadians. This means some of the highest income earners are taxed at a much lower rate than everyone else,” according to Morneau.
Essentially, there are three loopholes under the CCPC structure: income sprinkling or splitting, special capital gains rules, and so-called “passive investing.” Before your eyes glaze over: in short it means a lot of folks are not paying the taxes that they should.
You may recall that the Liberal government already eliminated income splitting introduced by the Harper regime, but if you have a CCPC, income “sprinkling” is still permitted. It allows incorporated high-income earners to split their income among family members, paying them salaries or dividends — even though they don’t work for the company. This is done in order to take advantage of lower tax rates. The government will continue to allow small businesses to pay family members who actually work for the company, such as family farms or doctor’s offices.
Owners of CCPCs can also pay themselves in capital gains that are taxed at 50 per cent less than the personal income tax rate. And thirdly, they can take advantage of passive investing rules — another special tax advantage that other working Canadians can’t avail of. Many CCPC owners “park” income in their business so it is taxed at the lower business rate, leaving them with more capital to invest in passive investments like mutual funds.
Lower taxes for small business aren’t supposed to be about passive investing, but rather to encourage reinvestment and job creation. At least this is what the small-business lobby argued when they demanded the lowest small-business tax rate in the G7 and got it.
These special tax rules are costing the tax system about $500 million a year. Not nearly as much as the failure to tax stock options properly, but still a fair chunk of change.
These tax loopholes also contribute to inequality. I agree with Morneau when he says these rules create two classes of Canadians.
Despite the outcry, academics who have studied the government’s proposals note that the vast majority of small business owners won’t be affected by them, because they don’t earn enough to take advantage of them. Some two-thirds of small business owners earn $73,000 a year or less. Those who will feel the impact are owners earning $150,000 a year or more and who have already maxed out their contributions to RRSPS and TFSAs and still have income left over to shelter.
Indeed, Kevin Milligan, an economics professor at UBC, who has studied the government’s tax reforms, said on social media that, “I struggle to find a general case for saving in a CCPC unless you have at least a few $100,000 of taxable assets overtop of RRSP/TFSA room.”
Michael Wolfson, an economist and expert adviser with EvidenceNetwork.ca, has found that almost 80 per cent of the top 0.01 per cent of income earners (those who earn $2.3 million a year) have incorporated themselves into a CCPC to avoid paying their share of tax on their incomes. And some 50 per cent of the top 1 per cent have done so.
If small businesses have a real case to be made, make it, but in the meantime stop with the overreaction and the whining.
Lana Payne is the Atlantic director for Unifor. She can be reached by email at firstname.lastname@example.org. Twitter: @lanampayne Her column returns in two weeks.