The consultation period for Justin Trudeau and Bill Morneau’s tax reform ended October 2nd. The tax reforms deal with two main loopholes in the use of private corporations, passive income and income sprinkling. If an individual incorporates and makes it the top tax bracket, they will be charged the small business tax rate of 15%, compared to if they didn’t incorporate in which case the tax rate could be as high as 50%.
The second plank of the tax reform is income sprinkling. This is when there is a family business and family members are earning income, despite not doing any work in the business. The government has proposed a reasonableness test, yet to be defined, to determine whether that family member is doing work to earn the income.
The Conservative critique of the government’s tax reform plan is twofold. For income sprinkling, the concern is that the amount of paperwork and red tape will increase across a lot of family businesses, just to catch a select few families using it for income sprinkling. As well, the reasonableness test proposed by the government is left vague and ill-defined. As for closing the loophole on passive income in private corporations, the Conservative concern is that it will have an unfair impact on legitimate small businesses, such as farmers and entrepreneurs, increasing the tax rate up to 73%.
The Liberals’ perspective is simple. A private individual incorporating should not have a lower tax rate than an unincorporated individual simply because they incorporated. In regard to family businesses practicing income sprinkling, the Liberals claim that 50,000 Canadian families are doing this illegitimately.
Regardless of whether the tax reform plan had merits to it, the implementation was not well thought out. For one targeting private corporations is the symptom, not the cause. The cause is that the top marginal tax rate in some provinces is as much as 50%. When you tax someone at a rate that they perceive to be unfair, they will start looking for ways to avoid paying that much such as incorporating.
When the Liberals introduced the bill, it was in the middle of the summer. As a rule, in politics, things introduced in the summer are generally something the government wants to push through with little debate. Leaving only a month left in the fall for consultations made the proposals seem rushed.
Finally, portraying the debate as a class divide between the hard-working middle class and wealthy doctors and lawyers was a mistake. Especially considering that it came out later that both Bill Morneau and Justin Trudeau have benefited from tax planning measures. We only have our neighbours to the south to look at what happens when you pit one group against another.
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