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The ONW Salon: Can The Liberals Quell The Tax Revolt?

Susanna Kelley (Moderator): The Liberals are lowering the small business tax rate to 9% as of 2019. This comes on the heels of a revolt by small business over other tax moves and news Finance Minister Morneau and his wife own a villa in France paid for by a private company they are partners in. Richard Mahoney, Will Stewart and Tom Parkin on the issues.


Tom Parkin:

How on earth did Justin Trudeau and Bill Morneau screw up a reform to end "income sprinkling" (also known as income splitting)––a tax dodge that allows self-incorporated people to pay their kids to do no work? Is there somewhere a defense for creating ghost jobs to avoid taxes?

What should have been so simple became such a bungle the Minister of Finance has had to buy his way out with an $855 million per year tax cut for small business—one that will be totally paid from debt, by the way. Now he and the Prime Minister have run away from the Ottawa press gallery and the Prime Minister won’t let the Finance Minister speak to the media.

To be fair, Morneau and Trudeau weren’t only pledging to end income splitting—though that would have been a better strategic move. But it was the core idea, and it should have been a slam-dunk.

Let’s draw some distinctions. Income splitting is a tax avoidance strategy. Revenues of a small business are paid to a family member who doesn’t do work for the business. In political terms, these are the fat cats. There are about 47,000 of them, according to CRA data.

Family businesses are the little guys. Government is supposed to be on their side. In these small businesses family members actually work and should be paid for it. It’s no tax dodge. In fact, it’s often a real struggle.

When you add in "T4 Nation"––also the little guy in this story­­––this should have been simple. It went wrong because the Liberals became the fat cats.

Two weeks ago, Heritage Minister Melanie Joly introduced a policy giving a 13% competitive advantage to fat cats over the little guy. She exempted fat cat Netflix and other foreign video streaming companies from charging HST on their service. But little guy Canadian services, like CraveTV or Videotron, must charge HST.

Then came the news the Canadian Revenue Agency was going to target retail workers’ employee discounts—more attacks on the little guy. How can this be a priority when Liberals won’t change tax havens and stock option income laws that favour the fat cats?

We next learned the Finance Minister himself is a fat cat who needs to put his wealth in a blind trust and can’t even remember he owns a corporation with a villa near the French Riviera.

In a quick succession of announcements and missteps, the Liberals became the fat cats. Once that idea takes hold in the voter's mind, anything being done by a fat cat doesn't benefit the little guy. So there will be more revolt as Canadians now distrust this government on taxes.


Will Stewart:

The past few months have been challenging for Minister Morneau. The communications rollout on the small business tax reform was a complete nightmare, and the revelation that he failed to disclose his private corporations to the ethics commissioner could not have come at a worse time. Mr. Morneau would soon like to forget these ministerial missteps.

The result: The Liberals desperately needed a channel changer. Monday’s announcement was their attempt at exactly that. Trudeau and Morneau needed to aggressively turn the page on weeks of tough headlines. So, Trudeau and Morneau shifted the blame. They shifted culpability from Canadians who were taking advantage of loopholes (hardworking Canadians like doctors, lawyers, and farmers) to blaming a tax system that treated everyday Canadians unfairly. In addition, the government tried to indicate that they are willing to listen to Canadians and adjust policy as needed.

But of course, there is a problem. No one, especially the media, sees this as a stand-alone announcement. The Liberals seem to be in damage control mode, which is a new position for them to be in.

It is quite surprising that the announcement to lower the small business tax rate (something the Harper government tried to do, and the Liberals cancelled) had to happen in a town north of Toronto. The skeptic says they did not want the Ottawa media, nor the Opposition, to be there. Instead many Ministers and MPs missed the day in Ottawa to serve as a human backdrop to the announcement. Not to mention the PM, who is frequently a media darling, trying to ensure it was his quote published by not letting the Finance Minister up to the mic. This also backfired on them and will now serve as a case study in how not to hold a press conference designed to dial down the pressure on the government.

The story became the process, not the announcement, which every political operative knows is not ideal to say the least.


Richard Mahoney:

As is often the case, there is much to agree on in the entries of Will and Tom, and parts where we differ. Sometimes, these differences come down to the differences in each of our parties’ partisan interests.  For example, Tom sets out quite clearly why income splitting in a small business is an unfair tax advantage and the good reasons why government should remove that advantage from the 47,000 companies that have it.   Small businesses should be able to deduct salaries paid to family members of the small business owner, as long as that family member does work for the company or provides value in some way.  That is the principle behind all of our tax laws.

I think he underestimates how difficult it always is to remove tax advantages from anyone.  When practices build up over time, people rely on those practices and they don’t like being made to pay more.  They are unlikely to see a removal of an advantage that results in them paying higher levels of tax––similar to the levels of tax paid by their neighbours who do not have that tax advantage of incorporating a small business––as a good idea.  Tom knows as well as that the NDP themselves have contributed to this controversy by not opposing the government’s efforts.

Will points out the wisdom in the move to lower the overall small business rate, so that small business owners will pay a lower rate of tax overall, softening the tax hit to all business owners, not just the ones who income split or “sprinkle” revenue to family members who do not work in the business.  This is true.   But he stretches the truth when he suggests that this is something the Conservatives tried to do and the Liberals cancelled.  Justin Trudeau promised to do just this in the 2015 campaign.  This is a promise kept.

The Liberals inherited a system that encourages wealthy individuals to incorporate in order to pay less tax.  That is just the way it is. This means someone making $300,000 can save about as much on tax as the average Canadian earns in a year—$48,000. That’s not fair, and they intend to fix it by making changes to address tax advantages that only the richest individuals using high-priced accountants can take advantage of. 

This has been difficult, and it is true that the government’s communications have allowed the opposition to make hay out of the proposals, suggesting the impact is much greater than it is.  The government’s consultation has listened to small business owners, professionals, farmers and fishers and they make it clear that they will act on what they have heard to avoid some of the unintended consequences that the Conservatives in particular are suggesting will happen.

In the midst of that, they are fulfilling their commitment to lower taxes on small businesses, from 11 per cent in 2015 to 9 per cent by 2019.   Will that make the controversy go away?   Probably not.  Any time you bring in change to make the system fairer, and someone has to pay more, you are going to have controversy.  But this is a good next step.


Tom Parkin:

As Will points out, everybody sees the small business tax cut not as a policy position but as an issues management problem. It is a solution to the Liberals' political problem, not the policy problem of tax unfairness. And so, far from bringing this to a close, it just further exposes the weakness of the government on a fundamental issue––tax fairness.

Having put the mantle of the fat cat on themselves, the Liberals' claims to be on the side of the little guy––the beleaguered middle class (and everyone working hard to join it!)––ring hollow. Worse, they appear deceitful.

That deceit was on display early in the Liberals' term when they made a "middle class tax cut" which gave the maximum benefit to someone earning $200,000. At the time no one paid much attention. But now it fits a pattern.

This story will continue to roll on. "Villa Billa" is being held to high scrutiny because of the Finance Minister's former role as executive chairperson on Mornea-Chapell, a company he inherited from his father but built up considerably.

At the time of the election, Morneau held two million shares in the company, worth $40+ million by today's stock valuation. Global TV's David Akin has written that if he still holds this stock, he would have earned $3.2 million in dividends since becoming Finance Minister.

But the issue isn't that Bill Morneau is rich––we all knew that. The question is whether his policies are advancing his business interests. And remember, those business interests are not in a blind trust.

Morneau-Chapell does considerable consulting work auditing so-called "target" pension plans. And last fall, Morneau tabled Bill C-27, which would weaken defined benefit plans and push them in the direction being reorganized as target plans.

Every worker knows that defined plans are better for the employee, target are beneficial to employers. But we didn't know that Morneau had a business interest in the latter.

These are the kinds of problems you get when you let yourself get set up as the fat cat. Suddenly all these stories and narratives get more resonant. And the relation to voters gets weaker.


Will Stewart:

I think there is a lot to what Tom articulates on this from the point of view of taxation. Obviously, I take issue with some of it as he and I differ considerably on money going to government vs. leaving money in the pockets of individuals and families.

Tom also raises a number of questions about our Finance Minister that certainly need to be addressed. Regrettably, we still have not heard from the Minister on this. He was not afforded the mic from Trudeau on Monday in a meaningful way. Of course he missed the Ministerial accountability session (Question Period) Monday for the regrettable travel to the GTA for the aforementioned announcement. Tuesday he was off to Quebec for yet another announcement while the PM was back in Toronto.

The new approach from the PM is to only show up in the House of Commons on Wednesdays so you know it will be the PMJT show again then, which means the Minister of Finance may not have to answer to Canadians until almost a week after the "Villa Forgotten" incident.

But let's not get distracted here. The move against small businesses started in an interview during the 2015 campaign where Trudeau spoke about small business owners as tax cheats in a Peter Mansbridge interview.

This is not new. They tried to do it then, they are trying again now, and people are rightfully outraged. They are now trying to distract and drive a wedge into the small business community by reincarnating this tax cut in the hopes that people will pack up from the fight and go home.

This is the exact type of politics that voters felt they were going to be rid of by voting for the Liberals in the first place.

Regrettably, both Trudeau and his Finance Minister come from considerable wealth not generated by themselves. We need to celebrate success in this country, so I do not have an issue with that. I do however take issue with being told that the dream of making it on your own is made harder by government policies that they themselves benefited from, and in some cases continue to benefit from. That is the credibility issue that they have on this particular issue.

The Liberals are masters at communication, no question. I am envious of it. But the first cracks in the facade have now appeared. The question is, can they repair this? If we judge by their first attempt, then the answer is no.

But lets not declare this over. The Liberals have now doubled down on this. And we know from similar fights in Ontario, when they double down, they put everything they have into it. Many of the same Ontario people that plotted the issues management on these disputes are in Ottawa now.

This is far from over, but certainly not off to a good start.

Richard Mahoney:

The NDP and Tom are attacking Morneau for his wealth.  Tom decries him “setting himself up” as a “fat cat” as if this is something he sought to do, rather than a partisan attack from political opponents looking to score points on someone who had great success in the business world, building up Morneau Sheppel to be a great success in the employee benefits consulting business.   Only New Democrats would see this as a bad thing. I suppose part of it is just the normal partisan competitive stuff––Morneau did beat the NDP handily in one of their target ridings.  So they wouldn’t start as fans.

But the suggestion that the company Morneau used to head up would somehow benefit from Bill C-27 is ludicrous and the NDP should be held accountable for saying so.   They have not pointed out one way in which it would, but that does not stop them from trying to defame a good man.   It is fine for the NDP to disagree with C-27––or any other policy such as small business tax fairness, but this is nasty stuff, and nonsense.

In fact, Bill Morneau shepherded in one of this government’s greatest accomplishments–– the enhancement of the Canada Pension Plan.  Following the path of Premier Kathleen Wynne’s proposal to effectively double public pensions in Ontario, which Tom’s New Democrats opposed and defeated the Wynne government on a confidence vote on the plan, provoking an election which saw Wynne returned with a majority government mandate to implement that pension plan, Trudeau and Morneau went to work on the other provinces.  They argued that Ontario and Wynne were right; we needed better public pensions in this country.  They argued that most of us don’t have a permanent pension plan at work and that in the new economy, even fewer of us would.  And they convinced the provinces that one province should not go it alone.  And so all Canadians will have a public, defined benefit pension plan, fully funded by employers and employees, which will increase our Canada pensions by about 50 per cent.  That is a huge step forward for Canadians.  That will decrease the reliance of Canadians on so-called “target” plans.  So Tom’s argument about Morneau benefitting from these changes is complete hogwash.  But Canadians will, starting in 2019.

Back to Susanna's original question:  will this quell the controversy over the proposed changes?   Not by itself.   It will help small businesses, as promised, and will weaken the arguments made by the opponents of the changes that these reforms are some form of an attack, as the Conservatives maintain.  The government has also listened during the consultations and is making further changes.  They will not go ahead with the capital gains changes because of challenges they present to passing on the family farm.  There have been clarifications on the “income sprinkling" proposed changes to make it clear that, as long as family members make a contribution to the business in some way, they can receive salary/income from the business in the normal way.  

There are more changes coming.  All of these will help calm the storm, such as it is, but we shouldn’t underestimate the controversy.  No one wants to pay more tax, and fairness is in the eye of the beholder.  And Opposition parties will make mischief with it, hoping that the 35 million Canadians who can’t income split, won’t remember whose side they were on.


Richard Mahoney is a lawyer with deep experience in politics and governance.  He is a former senior advisor to the Rt. Hon Paul Martin, a former Campaign Chair and President of the Ontario Liberal Party. Will Stewart is Managing Principal at Navigator, served as Chief of Staff to several Ontario Ministers and often appears as a national affairs commentator.  Tom Parkin is a veteran NDP strategist, columnist and a frequent commentator on national issues. 






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