Proposed small-business tax changes could cost Liberals countrywide

Far worse than Conor McGregor’s decision to take on this generation’s best boxer in his own sport, Finance Minister Bill Morneau has picked one dumb fight – even if he can smell the payday from the pending brawl.

Deemed disruptive to the point of destructive, retroactive to the point of retaliatory, inconsiderate to the point of insulting, his proposed small-business tax changes are the first real volleys of the Trudeau government in economic class warfare. 

We might worry how much more there is to come from a government that must somehow be worried about perennial deficits, but what’s immediately ahead is no picnic, so Morneau’s provocation has mobilized big and small business alike.

It has taken two years, but the honeymoon with business is now headed for estrangement, and like many separations it arises from a lack of communication and empathy.

Now, presuming the facts are in your corner, there are clear political benefits to attacks on the wealthy. Trouble is, there can be – and will be in this case – far more significant collateral damage to the self-starting cohort in the country, damage to the very middle class the government seeks to buttress and encourage.

In broad outline, Morneau’s vision is to alter the rights of family shareholders and the philosophy behind how small businesses are taxed on their earnings – and, in many cases, how they retain them. It aims to do so by curtailing how one splits income with family members and converts income into capital gains (to lower investment income tax), and by raising income tax on passive income inside a corporation.

Morneau, a trust fund beneficiary like his boss, has for weeks been trying to paint his proposals as a way to take away creeping entitlement, to find “fairness” and close “loopholes” – the scripted language of identity politics. He has taken to Twitter like Trump to argue his talking points, and has taken his lumps – as he will when the Liberal caucus meets in Kelowna this week and outlines the hornet’s nest he has kicked.

Most Canadians would support any diminution of an advantageous position to use money to shield money. But in so proposing, Morneau has found a way to rearrange hundreds of thousands of retirement plans and to vilify well-meaning operators of smallish enterprise as he tries to restrain richer incorporated doctors and lawyers.

Not surprisingly, he has awakened unusual allies not only in the professions, but in the entrepreneurial class and in family businesses, and in towns large and small. Pollsters are already saying this will cost Liberals countrywide, and for good reason, and no doubt the Conservatives feel a grassroots issue within grasp with the imminent resumption of Parliament.

In choosing this as his first step to revise the tax code, Morneau has essentially targeted a large legion that has driven growth. You can argue that his intention is ideal, but his prescriptions are not. Rather than sensibly reduce incentives to incorporate, Morneau is proposing tests on adult children to determine if they’re pulling their weight in the sprinkling of incorporation income upon them. There appear to be incomprehensible tests to calculate tax owing. Some private companies now will have more onerous duties than public ones.

The prescriptions make more complex what they try to simplify and are a mistake layered on a challenge. And in not showing his full set of cards to fix the sprawling code – by starting at Page 1, say, not in the middle of the tome – he has cheapened his credibility with retail politics.

Few doubt that the tax code needs a reset. For nearly a half-century it has been a slippery slope of political appeasement. But you do not nurture a culture and then seek to smite it, any more than you eat doughnuts each breakfast, lunch and dinner and decide you should suddenly sprint the Grouse Grind.

If there might be ways to fix decades of tweaking, providing a paltry 75-day period for Canadians to challenge the dramatic changes quite rightfully has the aggrieved parties apoplectic. Morneau certainly has to extend this and entertain a wider discussion to help us understand the destination and route. •

Kirk LaPointe is Business in Vancouver’s vice-president of audience and business development.