Finance Minister Bill Morneau recently announced that he wants to close up existing tax loopholes. Currently, highly paid professionals are able to reduce their taxes by incorporating and, then, using various small business tax breaks to shelter their income. Although Morneau argues that he wants to create a tax system that is fairer, some of the reaction to his reform has been hysterical to say the least.
The National Post 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. And predictably, the Canadian Federation of Independent Business (CFIB) described it as an unfair attack on small business. Meanwhile, the Canadian Medical Association (CMA) has warned 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) even circled in the skies above Parliament Hill, pulling a banner that read “No Small Biz Tax Hike.”
The rush by highly paid individuals to incorporate has its roots in the Harper government’s dramatic reductions of the small business tax rate — from 19 percent to a planned nine percent. The Liberals, after being elected in 2015, froze the federal rate at 10.5 per cent, however. That means that a professional earning $200,000 a year now pays perhaps 12 or 13 percent in small business taxes once both federal and provincial jurisdictions are taken into account. That same individual would likely pay close to 50 percent on income if unincorporated.
In theory, the incorporated individual would pay the going personal tax rate on money kept in the company whenever it’s taken out as income. Nevertheless, small business corporations have found ways around that. One such method is called “sprinkling
,” which involves having the business pay salaries to children and spouses who are in a lower tax bracket and who, in many cases, don’t work for the corporation. Another method is to convert income, held in the corporation, into capital gains — much of which is exempt from taxation. The remainder then draws much less tax than personal income does.
Of course, the broader question — which appears to be of no interest to the business lobby — is how an unfair tax system promotes inequality in Canadian society. One example is the offshore 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. If the CMA, the CFIB or the CTF have ever made any bold statements decrying this method of tax avoidance, 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.
So it’s rather interesting how some people consider the closing of tax loopholes to be class warfare. Yet hiding billions in off-shore tax havens and opposing minimum wage hikes merits no such description.
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