Finance Minister Bill Morneau’s Income Tax Acts changes need more consultation

When searching online for interpretations of the recently announced changes to the tax treatement for private corporations, an article popped up as the second Google news article with the title “Ottawa targets income ‘sprinkling’ loophole that lets wealthy Canadians reduce tax bill” written for and published in the Toronto Star by Robert Cribb.

It is clear why the Finance Minister Bill Morneau’s proposed changes to corporate tax for private corporations have not led to public outcry and anger.

In his announcement on July 18, Mr. Morneau could not have done a better job framing the proposed changes as a means to stop “wealthy” individuals who were not paying their fair share. A quote from the Department of Finance website from Mr. Morneau implies that the current structure “give(s) unfair tax advantages to certain – often high-income – individuals.”

No individual making $60,000 a year is going to be upset with the idea of some wealthy doctor, dentist or for all intents and purposes – some wealthy gentleman who resembles the Monopoly Man paying more tax and having “loopholes” closed on them. I am with you Mr. Morneau – lets close these loopholes. Forget the Panama Papers and the Isle of Man schemes, Monopoly Man should not be allowed to cheat the Canadian taxpayer anymore.

Mr. Morneau even mentioned that the change would affect his own corporate tax strategy, being brave enough to fall on the sword for the public good.

What the announcement by Mr. Morneau and the framing of it in the media fail to mention is, that, as of December 2015, there were 1,143,630 small businesses (under 100 employees) in Canada. These small businesses (remember – under 100 employees each) employ a total of 8.1 million people.

These 1,143,630 small business owners range from the owner of the deli where you buy your sandwich at lunch to the owner of the garage who changes your oil to the small grocer where you buy your organic produce.

These small business owners have corporations. If they have an accountant or even someone who knows the very basics of tax, they benefit from the “loopholes” which Mr. Morneau is proposing to repeal.

These are business owners who work 14 hour days that are not only selling their product during business hours, but doing administrative work until the late hours of the night.

These business owners have spouses who often stay at home because their focus on their business does not allow them to be home at 5 p.m. everyday to pick up their children or their pets. That is their choice, no question, but it is these individuals who are working the late hours and risking everything that they have, that are using the tax mechanisms Mr. Morneau refers to – not just the Monopoly Man.

Mr. Morneau, while being impacted by these changes, does not need to worry about making payroll, he does not need to worry about knocking on someone’s door who owes his business $5,000 in order to make sure he can make his mortgage payment, he does not need to worry about anything that the deli store owner or the mechanic needs to worry about on a day to day basis.

Mr. Morneau, without a doubt, has earned his wealth, but he has personal stock holdings of $30 million dollars and does not have the same concerns or focus of the average business owner. We thank you for your sacrifice though, Mr. Morneau.

Mr. Morneau uses the term “fairness” and “fair” throughout his speech. Both terms, as I understand, are not described anywhere in the Canadian Income Tax Act nor any Canadian law.

If they were to be, my presumption is that the following would also be considered unfair if not more unfair. Can we have “more unfair” added as a definition to the Income Tax Act while we are changing it to add “fair”?

• Small business owners are required to pay both the company’s and the employee’s share of CPP if they want to take a wage and pay into CPP. An employee pays $2,564 in CPP – a small business owner taking the exact same wage is required to pay $5,128 in CPP. Both receive the same benefit upon receiving CPP.

• Small business owners do not qualify for EI. If their business fails, and they lose everything, there is no safety net. Their employee, who lost their job but not the home that had a second mortgage on it, qualify for EI.

• A couple who each makes $75,000 (combined $150,000) pay $26,000 in federal tax. Another couple where one spouse has no income and the other has their own business and makes $150,000 pays $32,000 in federal tax.

The rhetoric around Mr. Morneau closing loopholes on the wealthy is just that, rhetoric. Mr. Morneau is doing what a number of business owners do – looking at alternative revenue streams.

It is incredibly important that all small business owners and their employees are provided the above facts. I encourage Mr. Morneau to take more time than the allowed two-and-a-half months, consulting with and sincerely listening to the public, small business owners and even the Monopoly Man before making such drastic changes to the Income Tax Act.

Derek Lamb, CPA, CA

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