Canadian Federal Liberals Alter the Tax Code: are the Changes Appropriate, or just another Tax Hike?

morneau tax

The Canadian Liberal government’s controversial new small business corporation tax proposal has brought new criticisms towards Justin Trudeau and his Finance Minister Bill Morneau. Outcry has come from those who believe owners of Canadian small business corporations are being unfairly targeted by a tax hike – all while being maliciously labelled as greedy tax cheats. Those in favour of the changes maintain it imposes a level of fairness for those paying tax through their owned corporate entities, as opposed to those who do not have these types of investment vehicles as an advantage.

Because Canadian corporate taxes are much lower than the progressive income tax rates, many entrepreneurs are able to keep money in their companies as a means to not only shelter it from higher tax rates, but also reinvest the funds inside their businesses. In Canada, the first $500,000 of income that a corporation generates is subject to a highly favourable tax rate federally through deductions (compared to the regular 15 percent federal rate – with the rest of the tax varying from province to province). The $500,000 figure is where small businesses typically operate in their income generations.

The main detractions on the changes have been drawn from how it will affect passive investment income and methods of income sprinkling through dividends of Canadian qualified small business corporations (incorporated small businesses that qualify for a capital gains tax deduction, and who meet certain criteria to qualify for this status). These are two ways in which small corporations and owners have been able to shelter income and have more available money for investments in the long term.

Small business corporations could previously invest funds outside of their business and pay a lower tax rate on passive income – compared to the rate if they invested it as an unincorporated entity. This has been a key way in which small business corporations can prolong investments inside their business if certain opportunities are not currently attainable. For example, if a company has money to invest but new machinery, property or new hires are not available, then they can instead take that money and grow it in investments to later be used for internal growth.

With the new changes, small business entities will be subject to a far higher rate of tax on passive investment income. In most scenarios, the amount being taxed will be equal to the rate a person without a corporation would pay. Members of the Canadian federal Conservative Party have thrown a 73% number out there, implying that this will be the rate if the mandates are implemented. In reality this number would only be realized in Ontario, and only if the amount earned from the investment goes directly into the owner’s personal account from their corporation.

Paying a low rate of tax on passive investment income previously gave small businesses the option to differ investment away from the here and now. The new Liberal government plan presumes that business owners have no intention to use this income for future investment. Instead, they want to incentivize them to spend available funds within their business as a method of growth. On one hand, this could mean more immediate employee raises and new hiring practices, as well as the purchasing of new materials, equipment and real estate to raise output. However, if a company can’t invest the money right away, then it may be prudent to put the money in an investment which realize capital gains or passive income. Instead, the Liberals want to force business owners to make more sudden decisions regarding internal investments without consideration for their current sensibility.

The second major change to the federal tax system comes in the form of how dividends from small business corporations can be issued to family members of business owners. This is a method in which business owners can save on their personal income tax by sprinkling funds out to spouses and children who do not necessarily have roles within their corporation.

This seems like an unfair practice for owners to be partaking in, as it allows them to reallocate funds to family members in order to reduce tax. Conversely, family members indirectly take on the risk in an entrepreneur’s endeavour, and such an option to sprinkle income to family members should be available to further allow a family to bear the fruits of shared sacrifice. The new policy takes away this option for business owners, and takes away their ability to allow their family to share in their success. The changes are also unclear on dividends to family members who have no role within the corporation, but have provided the business with a loan in the past.

There have been several members within the Liberal government who have spoken out against these proposed changes. Liberal members of parliament have issued letters of concern regarding the policy, and others have requested the deadline for the changes to be extended. A lack of uniformity within the party is indicative of this policy’s merits.

The Liberals as a whole have been framing this issue as an appropriate crackdown on unfair advantages by those they deem rich Canadians. Both Trudeau and Morneau use the same tired class baiting language in order to imply that those affected by the proposed changes have been unfairly profiting. They absurdly claim that this measure will somehow create new opportunities for lower class Canadians – when in reality, the only things being changed are opportunities for small business corporate owners. Ascribing additional taxes to one sub-group will not magically create comparable opportunities for those who do not own corporations.

This is the kind of peripheral and deceptive language which characterizes many of the sophistic claims of this Liberal government and much of the left in general. They masked their statements in ways which demonizes one group because of their perceived advantages, without striking a composed balance or nuance to what they are claiming. Such an effort is meant to insight a disposition toward the way wealthier people are perceived, and in turn strike envy into the hearts of left-wing constituents – some of which unknowingly base their nods of approval purely on a class based hatred of those who earn more because of a certain level of expertise, understanding, competence, discipline, sacrifice and education.

Trudeau and Morneau’s framing of this policy comes with personal hypocrisy. They claim this policy needs to be implemented in order to initiate fairness toward those they deem wealthy Canadians, while lecturing on what they deem to be equitable. They however are both the products of incredibly rich families, both of which exceed the net worth and status of those affected by these tax changes. Implying that this is a creation of fairness for the upper class is nonsense. Those affected by this are hard working small business corporation entrepreneurs who occupy the upper middle class, work long hours and provide a fundamental backbone to the Canadian economy and employment numbers. Trudeau and Morneau make it seem as though this is a tax increase on the wealthiest of Canadians, but that could not be further from the truth (Trudeau and Morneau in fact occupy that category).

Although the Prime Minister and Finance Minister claim a moral motive for this change, such is not the case. The reality is, the federal government needs increased tax revenue to make up for the growing deficit. Framing this as a moral issue allows the Liberals to score political points while implementing a tax hike to increase revenue to pay for their ever burdensome and growing programs.

Political opportunism, however, is not just prevalent on the left. The Conservatives have also played a hand in deception regarding this issue, particularly in the way they have framed its effects and consequences. Although they are right to criticize the policy, they have used a convoluted characterization of it in order to misrepresented who is being affected and what and how much is being taxed.

The Liberals are going to use this opportunity to raise additional government income while gaining political capital by virtual signaling upon supposed fairness and equity, all while they continue to receive heavy criticism for the policy. The main point of contest are to the changes on passive investments. It remains to be seen how this will affect economic growth. One thing remains, this measure is consistent with the Liberal government’s obsessions with income distribution and the politically advantageous promotion of social equity – as opposed to personal responsibility, private sector growth and competitiveness. More taxes in the future should be a norm for this government, as they seek additional funding for the expansion of federal debt spending and fiscally burdensome government programs – solutions they falsely believe are the only mechanisms to long term sustained growth and prosperity.

 

Sources and References: 

https://beta.theglobeandmail.com/globe-investor/personal-finance/taxes/proposed-tax-changes-will-shake-the-small-business-world/article35754872/?ref=http://www.theglobeandmail.com&

http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-small-business-deduction/

http://www.cbc.ca/news/business/tax-angry-business-loopholes-morneau-tax-consultations-income-sprinkling-passive-investment-income-1.4242280

Will Trudeau’s reforms really mean 73% tax for small business?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: