Sorry Mr. Morneau, Canadian entrepreneurs are not tax cheats

As Finance Minister Bill Morneau wrapped up his cross-country ‘listening tour’ to gauge Canadians’ reaction to proposed federal tax changes this week, it would have been easy to confuse the minister’s message.

He has made it clear the federal government is determined to promote greater fairness across the tax system, levelling the playing field for middle-class Canadians who they allege are at a disadvantage to business owners who can leverage a range of corporate tax-planning strategies to minimize their tax bill.

But Morneau was blasted at each stop by entrepreneurs who regard these measures as unduly burdensome. Fairness for who, they wondered? Even some Liberal MPs have joined the fray and called for a rollback on proposed changes.

As I outlined in a recent column for the National Post, there are legitimate tweaks the government can make to improve the tax system, but the Liberals are wrong to assume that limiting or altogether restricting three tactics used by corporations–income sprinkling to family members, limiting the ability of business owners to grow passive income portfolios within a private corporation and converting regular corporate income into capital gains–will achieve their goal of tax equality. Quite the opposite, in fact.

During those town halls, Morneau said he hadn’t heard anything to sway his opinion on the proposed changes, while insisting that the points were only up for consultation. This is not draft legislation. All the while he insisted that he is paying attention to the concerns raised by business owners and incorporated professionals such as doctors. “We’re trying to make sure we don’t have unintended consequences,” he said, as first reported by CBC News. “We are going to take into account the comments we are hearing to get this right.”

The unfortunate reality is this: until only a few days ago, the minister hadn’t been listening to Canadian entrepreneurs. Neither had his boss.

In recent comments, Prime Minister Justin Trudeau stated: “People who make $50,000 a year should not pay higher taxes than people who make $250,000 a year.” While it makes for a powerful populist statement, that simply isn’t true, either. Canada’s tax system is progressive. The more you earn, the more you pay. The proposed federal tax changes will grossly over-tax Canadian entrepreneurs. Trudeau later clarified that these new measures will not affect people making less than $150,000 per year. Again, this is untrue. That is exactly who these changes will affect.

Fortunately, Morneau’s comments in recent days indicate that revisions to the proposed changes might be in the works. My sources at the Department of Finance indicate that the government might even consider punting some of these new measures to minimize blowback from the business community. At this point, however, we need to proceed on the assumption that the government’s proposals will eventually become law.

That’s a major problem because there are many unintended consequences that could stem from this fundamental overhaul, ranging from the potential taxation (as a dividend at a rate of up to 45 per cent in Ontario) of corporate life insurance policy proceeds that currently flow tax-free, to limiting entrepreneurs’ succession planning flexibility, thereby making it prohibitively expensive to transfer a business from a parent to children.

I recently visited a few local Liberal MPs to express my concerns about the changes on behalf of our entrepreneur clients. The MPs listened and were responsive, explaining how they’d been briefed on the implications of these new measures. But on further questioning, it became clear that they didn’t fully understand the complexity of these new rules or their potential impact. The same MPs went on to vote with their government against extending the consultation period, as the business community had requested.

Once more, the government has used language of late that insinuates that business owners are somehow cheating the system by tapping legal tax-planning strategies. This is not only offensive, but again, patently false. How can someone cheat the system when it’s the system that set up the rules for them to follow in the first place? The reality is that the Liberals, in their zealousness to defend the interests of their middle-class base, are targeting that group with these changes.

Even if new tax legislation reflected the Liberal talking points verbatim, the ultra-wealthy would still be able to income split. Those who would suffer are the owner/operators of smaller SMEs. They, as a rule, are middle income earners who have already been hurt by everything from provincial and federal changes to the middle-income tax bracket, to the curbing of measures such as income splitting between spouses and even seemingly benign benefits such as cuts to various tax credits like those used to incentivize transit usage.

Factor in the impact of legislation such as Ontario’s Bill 148–which imposes a steep minimum wage hike and boosts paid emergency leave and vacation entitlements, among other changes–and it’s obvious why business owners are outraged by the federal government’s seeming unwillingness to heed their concerns.

These are not millionaires accustomed to flying on private jets and using overseas accounts to hide their millions.

They are hard-working business owners who take risks to create jobs in our economy, many investing their life savings (and far more in loans) to start, run and grow companies that fuel our national economy. Most start with nothing and gradually build their wealth over time. Some lose it all multiple times only to try to find success once again. You simply cannot compare an individual who isn’t willing to take that kind of risk to someone who is. In much the same way that we seem to agree as a society that government employees should be provided with generous benefit and pension packages, can we not also agree that offering entrepreneurs corporate tax incentives to help stimulate our economy is worth the investment? After all, the proposed changes would only save the treasury an estimated $250 million per year.

Furthermore, incorporation is available to everyone. This is not a benefit bestowed upon some elite entrepreneurial class.

The other great concern is the health of the national economy. Job growth has been lagging outside the service sector in recent years, due largely to growth-stifling legacy policies. Interest rates, while beginning to rise, are also so low that they have created a distorted–some might even argue false–economy. Business owners watch trends and key indicators closely. If they can’t reinvest their retained earnings or take advantage of other tax-friendly policies, they may look to cut jobs to earn a greater return on their earnings. They might even forego starting a new business in the first place if they feel the potential return on investment isn’t worth the effort.

The federal government’s 75-day consultation process ended this week, and the government seems to have finally taken note of the palpable anger and legitimate concerns being expressed by entrepreneurs. But their tone needs to change and the speed at which they propose implementing these changes needs to be significantly dialed back. In fact, they need to pause and rethink these measures altogether.

Thanks to a grassroots backlash from the business community, hopefully the minister has learned that entrepreneurs are not tax evaders, and their financial interests deserve as much protection as any other Canadian.

Armando Iannuzzi, partner

Armando Iannuzzi

905-946-1300, x. 239