The federal Liberal government says its plan to tweak the country’s tax system is a matter of fairness and following through on a clear election promise.
But business groups, professionals and Conservative politicians across the country have united in protest against changes they say amount to a tax grab and an assault on hard-working Canadians.
Finance Minister Bill Morneau has introduced a bill that would restrict the ability of high-earners and business owners to use corporations to lower their tax bill.
Many lawyers, doctors and others wealthy professionals use private corporations to protect themselves from legal and financial liabilities.
Morneau’s proposed changes target practices he says allow the rich to effectively pay a lower rate than the middle class:
- A tricky, and likely rare, practice that makes investment dividends appear as capital gains – which are taxed at a much lower rate. Morneau’s plan would add new regulations to those already in place to restrict the practice.
- Income “sprinkling” allows incorporated people to make their adult children and spouses shareholders in their corporation and pay them dividends. The Liberals want to introduce a “reasonableness test” to determine how much work the dividend recipients actually do for the corporation to earn that income.
- Morneau wants people who invest money from within their corporations to pay more taxes. This, he says, will close the gap between those who pay the higher personal income tax rate before having the chance to invest rather than paying the lower corporate rate (15 per cent) and therefore having more money to invest.
Conservative Abbotsford MP Ed Fast said last week in the House of Commons that his constituents are “angry as hornets over these terrible tax proposals.”
“Blueberry farmers, entrepreneurs, small business owners [are] up in arms,” he said in an impassioned address. “In 12 years as a parliamentarian, Mr. Speaker, I’ve never seen such outrage.”
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Allan Asaph, executive director of Abbotsford’s Chamber of Commerce, said he, too, has heard from local professionals about the effects these changes will have. He said he’s concerned the changes go too far and will hurt small and medium businesses as well as large ones.
Asaph criticized the government’s roll-out of the plan over the summer and a consultation period he said is too short.
He said the proposal to tax passive income from invested corporate funds does not achieve its purported goal of levelling the playing field between employees and business owners.
“In fact, that doesn’t recognize that you’re talking about two different playing fields,” Asaph said.
He says the lower rate on such investments offsets the business owners’ risks and lack of access to employment insurance and retirement savings.
For example, he said, an employer having a bad year could have little taxable income to invest in an RRSP after paying their employees, keeping a rainy day fund and operating their business.
Asaph did, however, concede that “the government is listening” to the business community’s concerns.
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Liberal MP Jati Sidhu sang a very different tune when interviewed about the tax proposals. The Mission–Matsqui–Fraser Canyon representative said he has heard from many constituents opposed to the changes but suspects those affected represent only one per cent of those living in his riding.
“A lot of people don’t understand that they’re not being impacted by this,” Sidhu said. “If one does not make more than $150,000, he or she should go to sleep without even looking at this change.”
But he blamed his own party for this lack of understanding.
“I need to admit, the delivery wasn’t done properly,” he said.
Sidhu said he is passing on all feedback his office receives to Morneau and that the consultation period is open until Oct. 2. He said there may be slight changes to the proposals but he fully expects them to be passed.
Political scientist Hamish Telford said the Liberals have stumbled in their delivery of these proposals, especially for a “government which is generally pretty sophisticated on its communications strategy.”
“They sort of dropped the ball on this one,” the University of the Fraser Valley professor said.
He said their mistake was treating this package of tax changes on its own, rather than pairing it with positive benefits for other groups, as they did in their first budget when they introduced middle-class tax rebates and child benefits at the same time as tax hikes on high-income earners.
“There are no winners here. There are only losers and those losers are pretty angry,” Telford said. “And they happen to be the sorts of people who can express their anger effectively in public.”
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