Contractor associations, PCs and NDP hammer Morneau’s small business tax plan
Income sprinkling and passive investments within professional corporations are firmly in the Department of Finance's cross hairs
September 21, 2017 by Steve Payne
Federal Finance Minister Bill Morneau and the Trudeau government have taken a hammering during question period in Ottawa over the last 72 hours over Morneau’s proposed tax changes to small business. Both the PCs and the NDP oppose the plan. Nevertheless, the Liberals, with a majority government, can do what they want.
Within our industry, opposition has been lodged (as signatories to a joint letter to Morneau from 35 business associations within the Coalition For Small Business Tax Fairness) by the Canadian Home Builders’ Association, the Canadian Construction Association, the Mechanical Contractors Association of Canada and the Canadian Institute of Plumbing & Heating.
Morneau’s department is still conducting “consultations” on the plan – until at least Oct. 2. But only recently have most industry groups weighed in on the proposal. The Finance Department first announced the impending changes to the tax code in July – the dog days of summer – and publicity on the issue was low-key until a few weeks ago. Now, with less than two weeks ago to the end of consultations, Morneau is taking a beating on the issue in the mainstream media and in the House of Commons.
Yesterday, Morneau conceded that the current “consultations” may alter his plan(s). The Opposition has urged Morneau to extend the consultation deadline. To read the official Finance Department description of the tax changes – and to register your own opinion(s) on them – visit this website: Tax Planning Using Private Corporations.
While the proposals are complex, a simple explanation of Morneau’s small business tax plan is that it aims to close “loopholes” in the tax code that allow individuals who set up professional corporations (many of them doctors but also farmers, contractors, architects, accountants and others) to shelter income from Canada’s high personal income tax rates.
All good accountants know the various (currently legal) ways to do this. The most popular methods include (1) “income sprinkling,” in which a business’s income/retained earnings is attributed to family members, with lower personal income tax rates presumably, who may or may not legitimately work in the business; and (2) the conversion of income/retained earnings into “passive investments” like stocks, bonds, or even real estate, held within the company itself or held in a holding company. Morneau’s tax reform plan argues that, unless that money is actually put to work to build the business, holding such investments within the company is just a tax dodge – although currently a legal one. And that continuing to allow these income-avoiding accounting moves creates an “unlevel playing field”: essentially two classes of taxpayer – those who have the opportunity to shelter income from taxes like this (the owners of professional corporations) and those who do not.
Entrepreneurs and their advocates argue that there needs to be two classes of taxpayer, since there are two classes of income earners. Self-employed business owners face income risk and uncertainty not usually experienced by salaried employees. And they also lack pensions, benefits, paid holidays, paid sick days, etc. Critics have also pointed out that both Morneau and Prime Minister Justin Trudeau personally benefit from tax-sheltering family trusts – which are not vulnerable under the Morneau tax reform plan.