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Feds playing the class warfare card is a political miscalculation

It’s disappointing to see Finance Minister Bill Morneau and Prime Minister Justin Trudeau engage in a subtle form of “class warfare” against professionals and small-business people given the proposed tax changes that would detrimentally affect lawyers, doctors, farmers and other small-business people who run their businesses through corporations.

So, let’s be a bit bold and provocative in the definitions department and call these people “job creators.” Apparently, the changes are required because the current tax treatment is supposedly unfair to “regular” Canadians who are paid hourly or on a salary (let’s be equally bold and provocative and call them “job recipients”).

And, by the way, if the federal government wants to lump lawyers, doctors and other small-business people into the so-called one-per-cent category and call them all “rich,” I have no trouble with the “job creator” and “job recipient” definitions that I’ve used — but I digress.

I think that, by now, everyone is aware of the proposed changes, but to summarize the two most important ones:

1. Job creators who run their businesses through corporations should no longer be allowed to “sprinkle” income to their family members at lower rates, because job recipients can only be taxed on their employment income and can’t take advantage of income sprinkling the way job creators can. This, of course, ignores the fact that many family members are involved in the job creator’s business. Indeed, the family home is often pledged as security for the family business, and the family home can be lost if the business is unsuccessful.

2. The federal government wants to eliminate a benefit available to job creators who invest the after-tax retained earnings derived from active business operations in passive investments. The government’s intention is to increase the tax rate payable by job creators so that there will not be any tax benefit in retaining the funds within the job creator’s corporation for re-investment. Translation? If you are lucky enough to have retained earnings and you want to re-invest those earnings in another business to cope with an unsteady economy or to fund expansion and innovation (or, in case you don’t have a cushy pension plan, to fund your own retirement or even a maternity leave), you’ll still be taxed as if you hadn’t made the investment.

Lawyers, doctors and others who own and operate their businesses take huge business and personal risks that salaried employees are not prepared to take on. Salaried employees do not provide personal guarantees to fund payroll, the trade debts of their employer or the monthly rent paid to their employer’s landlord. Consequently, hourly or salaried employees do not risk bankruptcy, insolvency, financial ruin, the loss of their homes and the loss of their businesses the way job creator employers do. Likewise, doctors, lawyers and small-business people do not enjoy (dare I say) cushy pension plans like many job recipients in the public and private sector do.

Job creators are entrepreneurs and take enormous risks, particularly, the risk of failure. Job creators can lose their livelihoods, their houses, their marriages (and their shirts) if they are unsuccessful. Their salaried employees can lose their livelihoods and houses if the job creators for whom they work are unsuccessful. So, it’s important for the Canadian economy that risk-taking entrepreneurial job creators are successful, and these proposed tax changes put the continued success of job creators at risk.

And, by the way, not only do job creators pay their taxes, they are the ones who hire salaried job recipients so that they can pay their taxes, own homes, raise families, buy cars, go on holidays and keep the Canadian economy humming (and happily retire).

Job creators don’t get minimum wage, overtime pay, paid vacation, employment insurance, maternity benefits, health benefits, the protection of employment standards acts, consistent paycheques every two weeks, paid sick days, the right to unionize and other benefits available to salaried employees.

Besides, job creators are usually well into their 40s and early 50s before they start to “get ahead” and are able to set aside money for retirement, unless they are among the 50 per cent of businesses that fail during the first 10 years of operation (see “risk of failure” above). In fact, many doctors, lawyers and other professionals will graduate with student debt anywhere between $50,000 and $150,000, which will take years to pay back. Although I like Morneau and I think he’s a smart guy, very few doctors, lawyers and other small-business people have existing multimillion-dollar family businesses to work in shortly after they graduate from university (no matter how likable and smart they are).

So, if “income sprinkling” motivates an entrepreneur to take on the risk of starting and growing a small business (such as a law office) and that business hires job recipients, it serves a valuable public purpose.

And if investing retained earnings in passive businesses helps to finance business expansion, the vagaries of the economy or fund a lawyer or doctor’s retirement or maternity leave, it serves a valuable public purpose.

Tax specialists will privately say there are a lot of things the federal government could be doing to raise more money without unfairly targeting the small-business sector, including enforcing existing income-splitting rules so that split income that is not actually paid to trust beneficiaries is fully taxed. Or the Canada Revenue Agency could better enforce existing personal service business rules and corporate attribution rules, reduce the gap between the capital gains rates and the dividend rates and effectively end “artificial tax planning” (thus avoiding pages and pages of new rules). Tax specialists privately say that if the CRA simply enforced its existing rules, the result could amount to billions of dollars of new revenue. All the CRA would need are beefed-up reporting rules and some very smart computer programmers.

But no.

What these potential changes do (apart from alienating those who would normally support the  Liberal party) is to discourage entrepreneurs from going into the private sector and taking the risks the Canadian economy needs to create more jobs for job recipients.

The problem is, if the federal government treats everyone like a salaried job recipient, there’s no monetary incentive to be a job creator. And once there are no more job creators, there won’t be any job recipients either.

  • Goodbye Liberals...

    These changes are so preposterous and uninformed that I cannot in good conscience ever vote for another Liberal. Just the fact that such ridiculous changes can be proposed in a supposedly professional environment such as the Liberal party gives me no confidence that they could ever run a business... let alone a country.
  • really

    I don't know were you are getting your information from, but is very flawed.
  • Limited sympathy

    To say that tax rules will affect the demand for doctors is a stretch. It's the demand that creates the jobs, and there's lots of demand. Similarly there are not as many company pensions available these days, so assuming one is available to most employees is unrealistic. I agree that there's an appropriate place for small-corporation taxation, but let's keep the justifications and comparisons realistic. Personal income tax has provisions for professional income sources, complete with deductions for costs incurred to earn it. If those need fine-tuning so be it, but the income left after expenses are paid is still money in your personal bank account. Why would it not be taxed as such?
  • really?

    It really depends on the role. Doctors are paid by the govt and get a great deal of funds other then fees to establish clinics etc. Lawyers can be part of partnerships that mitigate risks for individuals. They still use the loopholes. Farmers benefit from all kinds of govt programs to mitigate risk. I think if family members are legitimately involved in the business, they can still be paid. But fake employment sprinkling should not be done. I don't see any excuse for it. I still think the small business rate still remain in place, so the tax rate is still favorable AFIK