As they get set for a caucus meeting in British Columbia this week, Justin Trudeau’s Liberals are reportedly taking a long, hard look at proposed changes to the tax system that have triggered a revolt among doctors, farmers, and other incorporated small business owners.
In an op-ed published Tuesday in The Globe & Mail, Finance Minister Bill Morneau attempted to explain why the government feels the tweaks are needed, arguing that they primarily target high-income earners and make the tax system fairer for everyone.
But his proposals, first unveiled in mid-July and now subject to a 75-day consultation period, have proven a harder sell for the Liberals than anticipated.
“The consultation period ends October 2nd, and it’s just not enough time,” said farmer Todd Nixon, who runs his business out of Manotick, near Ottawa.
“I’m not an accountant, but we rely on experts, accountants to advise us on succession planning, tax planning,” he said.
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Nixon’s family incorporated their fourth-generation farm in 2012, and have been using the tax savings to prepare for retirement and for post-secondary education for the kids. The business income is split between himself, his wife and his parents at tax time, an arrangement which could end if the proposed changes go through, leading to thousands more tax dollars owed to the Canada Revenue Agency each year.
“We had it set up to go along with the rules that were in place, and now the rules have changed … it would affect our cash flow going forward,” Nixon told Global News.
The blowback against the proposals has been particularly acute among Canadian farmers and doctors, who say they are being labelled unfairly as tax cheats. Some have even tweeted at Morneau from their “tax shelters.”
https://twitter.com/DefendSmallBizz/status/902595344839491584
The “loopholes” are also dominating the conversation on Parliament Hill. On Tuesday, the opposition Conservatives called for an emergency meeting of the House of Commons finance committee to discuss the proposed changes.
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WATCH: Finance Minister Bill Morneau on decision to make changes to the tax system
Conservative finance critic Pierre Poilievre said that like many Liberal MPs, he’s been bombarded with complaints from his constituents. As examples, he said he has spoken to the owner of a local dry cleaning business and a dentist hoping to open a practice in Canada about the changes, and both were extremely upset.
“The Liberals have successfully combined, in one single policy, making it more difficult to get a family doctor, making it more difficult for young people to find their first jobs and making it more difficult for middle class families to save for their futures,” Poilievre said.
“Conservatives are calling for the government to back down from this tax increase.”
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The Canadian Federation of Independent Business, meanwhile, has called Morneau’s proposals “alarming” and is inviting its members to take action.
The Canadian Medical Association has also sprung into action on behalf of its membership. The CMA’s new president has warned the government that the moves will likely have “unintended consequences.”
Because doctors can’t increase their fees (set by the provinces), the argument is that they will have less money left over after taxes for things like retirement savings, savings for parental leave, or paying off their student debt.
READ MORE: Small business owners angry about proposed Liberal tax changes
Specifically, the government is proposing three things, all of which directly affect people who incorporate a business in Canada.
First, Ottawa hopes to put an end to “income sprinkling,” which allows business owners to split their overall income among family members (who earn less than they do) and to therefore to have the income taxed at a lower rate. The government estimates about 50,000 families use this as a means to save at tax time when, in reality, one of the family members isn’t really employed by the business at all.
If the changes happen, a new “reasonableness” test would be applied to make sure that everyone earning income is actually contributing.
WATCH: Bill Morneau outlines how income ‘sprinkling’ works
The second and third changes involve preventing business owners from converting their corporation’s regular income into capital gains (profits from the sale of property or of an investment) and ending their ability to hold a passive investment portfolio inside a private corporation.
For Nixon, all of this may mean that the decision to incorporate his farm five years ago was a waste of time and money.
“It’s a big undertaking to go through an incorporation,” he said. “Farming’s a capital-intensive business … it takes a lot of cash flow to keep that going, and if we have to pay more in tax it means less cash that we have to reinvest in the business.”
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