Justin Trudeau insisted Wednesday that his government won’t back down on a controversial plan to end tax provisions that he says provide wealthy small business owners an unfair advantage.
“I want to be clear, People who make $50,000 a year should not pay higher taxes than people who make $250,000 a year.” – Justin Trudeau
So what is this controversial plan?
Finance Minister Bill Morneau launched a 75-day consultation period for three proposed changes:
- The curtailment of “income sprinkling,”
- The curbing of “passive investment income,” which the government describes as the investment of money left in a corporation, for purposes other than to invest directly in growth.
- The conversion of a corporation’s regular income into capital gains, which typically attract a lower tax rate.
These three changes have received criticism from mom and pop shops, doctors, and large business’, with most criticism being aimed at the first two aspects of the plan.
Income splitting is a method by which business owners shift a portion of income to family members, either through salary or dividends. Although it may seem unfair at first it is a method by which small family owned ventures manage to operate when facing ever increasing competition from large scale market disruptors such as Amazon.
For example, a husband and spouse who share ownership within a business would now be forced to receive lower dividend payments and have to pay higher taxes. In the case of a stay at home mother, this act directly devalues the labor she performs at home. The stay at home mother receives 50% of the corporation as she takes the risk with her spouse and divides the labor of the family unit. By acting as if the spouse is not a legitimate partner, you either break down that family relationship or devalue the labor of a stay at home spouse.
A great example of this can be found in recent CBC article which quotes an Albertan business owner:
“If, God forbid, I divorced my wife of 33 years tomorrow, the government would say that half this business belongs to her. She stayed home and raised our three children, she’s participated in the risk, the whole family did. So why shouldn’t she be paid.”
Alberta’s Economic Funk
Alberta has been mired in a deep economic funk for several years.
He’s had to meet payroll from his own pocket, he says, “but it’s not my pocket, it’s my family’s pocket.” He’s also, in the past, risked the family home as collateral for a loan to the business. The risk of the business, he says, is shared by the family, and tax law should recognize that.
In reality, the act of tackling small business income splitting involves attacking the safety of the family unit for the purpose of receiving just a bit more tax income.
Money is left within a business for a purpose, to make sure you can handle rough patches and rainy days. Business owners, unlike employees, do not have the capacity to tap into a wealth of support programs. If your business lacks the funds and you do not have access to loans in most cases you are done.
Not only this but in most cases, you are expected to be able to continue to the employee and provide for your staff. By pushing to reduce this they are in turn reducing the survivability of small business by forcing them to either spend their cash or lose it to the government. Once again aiming to capture more money at the risk of the Canadian economy.
Attack on the Medical Industry
Although the Canadian Federation of Independent Business, representing more than 100,000 members, is now directly opposing these changes it is perhaps the second most affected by the potential change in passive income laws. Medical practitioners in Ontario were allowed to incorporate their practices in 2005 to allow them to reduce their tax burdens.
This was done to make sure the fees doctors required to charge remained low.
Doctors required these increases as they receive no benefits and in many cases cannot take any sort of parental leave. They, therefore, use income splitting to pay for their spouse to remain at home.
“No maternity leave, no pension, no retirement, I have none of those options,” she said. “I’m having to choose between having a family and actually practising as a physician here in Canada.” – Anita Sanan, physician in Kelowna
By reducing these measures they directly attack the healthcare budget and your pocket book. Doctors will be faced with a choice, they will now either fight to increase fees or they will fight to privatize medical services further. In the case that neither options can be fulfilled we will see more Doctors choosing to go South to practice medicine.
In the case that neither options can be fulfilled we will see more Doctors choosing to go South to practice medicine. This is simple healthcare economics, and by doing this tax plan again we can see the policy generates some tax revenue for the government while directly hurting the services you receive.
Morneau insists the plan will affect only those who earn $150,000 or more and who still have money to shelter from tax after maxing out their RRSPs and tax-free savings accounts but fails to mention any of the realities of these people. He fails to mention their hard-work, the complete lack of government support for their labor, and even worse seems to fail in comprehending the real damage that can occur to the Canadian economy if these small businesses fail.
Perhaps worst is the direct dedication from this government to equalize the earnings of wage earners and business owners, forgetting that it is the incentive that drives business. If you remove the incentive to innovate and to own, you, in turn, create a society that does not create.
In the age of technology that is simply not a possible solution.
It’s time for Liberal to stop their tax and spend politics, and it’s time they stop playing with our economy. We need a real plan for economic growth, and sadly it seems Justin has none.