Jennifer Chan, a 44-year-old physician from Winnipeg, works in the most economically disadvantaged postal code in Canada. She doesn’t feel like a “fat cat,” yet she is about to bear the brunt of the Liberal government’s new small-business tax reforms, which it says are aimed at closing “unfair tax loopholes” being exploited by the top 1 per cent of earners.
“I just had my 2004 Subaru towed to the garage. We are very fortunate but we are not fat cats, and I don’t feel like I am cheating the system.”
The cash-strapped Liberals would like to get their hands on up to $3 billion of the $27 billion or so of “passive” income earned by small-business corporations. Simply put, Bill Morneau, the finance minister, needs the money — even at the risk of reducing the rewards available to would-be entrepreneurs.
Getting the tax revenue without paying a ruinous political price depends on convincing Canadians the new tax proposals will hit only the super wealthy, not mom-and-pop small business owners, who the Liberals claim they are trying to help.
The consultation paper has a raft of proposals but the one that will raise most of the money is the imposition of higher taxes on small-business profits that are invested passively — in bonds, stocks or real estate — inside a private company. Currently, the tax rate paid on the passive investment is the small-business deduction rate of 10.5 per cent, rather than the higher regular income-tax rate.
The problem the government is going to face is that many, many small businesses are owned by people who consider themselves middle class — and they are not thrilled at the prospect of hefty tax hikes.
In a letter to Carolyn Bennett, the minister for Crown-Indigenous Relations and Northern Affairs, Chan said she has spent a large part of her career caring for patients affected by the legacy of residential schools. “I am now indignant at being painted as a tax cheat,” she wrote.
“I have patients who are living in the most severe consequences of this legacy, including post-traumatic stress disorder, addictions, poverty, homelessness, violence, fetal alcohol spectrum disorder and other mental health diagnoses such as anxiety and depressive disorders…. I do not feel it is in the spirit of reconciliation to demoralize those who are doing the tough work on the ground.”
In an interview with the National Post, Chan, a mother of two, said she pays herself a salary to cover personal costs and saves up to $60,000 a year in her corporation for her retirement.
“I still pay plenty of taxes. When I take it out of the corporation, I will pay 50-per-cent tax on it.”
She said she didn’t start earning a full salary until she was 30, and money she had invested passively had to cover her two maternity leaves and time off to look after elderly parents.
The changes will hit female physicians disproportionately, Chan feels, potentially persuading some to take less demanding positions.
“There is definitely a struggle to avoid burnout. Some days I think I could be doing something not as emotionally stressful.
“I find it a strange political strategy, to attack small-business owners. It’s not the fault of doctors or farmers or convenience-store owners.”
Those affected are likely to become even more irate once they realize the magnitude of the hit they are about to take.
According to University of British Columbia economist Kevin Milligan, under the new proposal, for every $100 invested passively inside a corporation over 10 years owners will lose $15. Under the status quo, the amount available for distribution after 10 years would be $127.23; under the new proposal it would be $112.19.
Milligan defended the intent of the reform — to restore neutrality and balance between the taxation of savings inside and outside a corporation. But he conceded the changes will have to be implemented with a deft touch to ensure that regular mom-and-pop small businesses are not hurt.
There is an appeal to the tax-fairness argument — if you can park the suspicion that the Liberals have adopted it to justify grabbing the maximum amount of cash.
But there is an even more compelling economic case to be made that reaches back to Adam Smith’s Wealth of Nations — that the wages of labour should vary according to the difficulty of learning the business and according to the probability of success.
Canadian Chamber of Commerce president Perrin Beatty made his own fairness case Tuesday, suggesting that the circumstances of a salaried employee and a small-business owner, each earning $80,000, do not make for an apples-to-apples comparison. The salaried employee likely has a generous pension and paid vacation time, Beatty pointed out, while the business owner may have pledged personal assets as collateral and has other stresses not borne by employees.
“Who would begrudge a business owner the ability to invest her profit and earn a decent return after paying corporate income tax,” Beatty said, “especially when her savings may be needed to sustain her business through dry spells?”
The answer to that, it appears, is Bill Morneau.
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