Finance Minister Bill Morneau wants to close loopholes that allow highly paid professionals to reduce their taxes by incorporating and then using various small business tax breaks to shelter their income. These loopholes are legal but unfair. They amount to potentially more than $1 billion annually in lost revenues to the government. That money could be used toward pharmacare, affordable housing or building green infrastructure. Morneau argues that he wants to create an improved tax system but some of the reaction has been hysterical.
The National Post newspaper described it as a “class war.” In The Globe and Mail, an economist for a money management firm wrote that the planned changes could create a recession. Predictably, the Canadian Federation of Independent Business (CFIB) described it as an unfair attack on small business. The Canadian Medical Association (CMA) threatened that many of its incorporated members might move to the U.S. As parliament began to sit again earlier in September, an airplane hired by the Canadian Taxpayers Federation (CTF) circled in the skies above Parliament Hill pulling a banner that read “No Small Biz Tax Hike.”
The rush by affluent individuals to incorporate has its roots in the Harper government’s dramatic reductions in the small business tax rate, from 19 per cent to 10.5 per cent in 2015. It’s too sweet a deal to pass up. If they are incorporated, high income professionals pay perhaps 12 or 13 per cent in small business taxes once both federal and provincial jurisdictions are taken into account. The same individuals would likely pay taxes of close to 50 per cent on salaried income.
In addition, some people have found other ways to avoid paying taxes. One such method is called “sprinkling” and it involves having incorporated individuals pay salaries to children and spouses who are in a lower tax bracket. In many cases they actually do no work in return for this compensation. The government proposes having businesses prove that the family members are legitimately earning that income. The CFIB opposes that, saying it “could add more red tape to business operations.”
The business lobby has been aggressive regarding the tax reforms but it does not have the field to itself. A group of doctors has come forward to say that they favour the reforms and are “fed up” by the actions being taken by the medical associations. The Canadian Nurses Association also supports the proposals, and a more broadly based campaign has been created by unions, Oxfam and other civil society organizations. In another action, an open letter to Minister Morneau drafted by the organization Lead Now in favour of the reforms has attracted over 14,000 signatures.
Flawed tax system
The broader question here, which appears to be of no interest to the business lobby, is how a flawed tax system promotes inequality in Canadian society. One example is the off shore tax havens being used by wealthy Canadians to hide money and avoid paying tax. One estimate puts the figure of forgone tax revenues at $6 billion and the Canada Revenue Agency appears unable or unwilling to confront this evasion. If the CMA, the CFIB or the CTF have ever made any statements decrying off-shore tax havens, I must have missed them.
What’s more, the business lobby routinely fights any proposals to raise the minimum wage, as it is now doing in Ontario. The CFIB also opposed measures to improve the modest benefits available to workers under the Canada Pension Plan, which is funded by contributions from both workers and their employers.
It’s interesting that for some people closing tax loopholes is considered class war, but hiding billions in off-shore tax havens or opposing minimum wage hikes merits no such description.