By limiting the measures available to some to reduce their tax bills, the federal government says it is taking steps towards economic equality. However, the proposal has received strong criticism from the Conservative Party, small business owners and others who may be affected by the changes.
The plan will affect three main tax strategies:
- Income sprinkling: Allowing business owners to lower their tax rate by splitting their income with family members in lower tax brackets. The government wants to apply a "reasonableness test" to determine whether an owner's adult children actually contribute to the business.
- Capital gains: Claiming regular business income as capital gains - profits earned from the sale of securities, stocks or property above the purchase price. These are taxed at a lower rate.
- Passive investment income: Investing in portfolios held within a corporation. The Department of Finance says that some individuals unfairly benefit from this because this investment income is taxed at much lower than the personal income tax rate.
'I have never heard as much anger on a federal issue'
While the government says these changes are targeted at the very wealthy, small business advocate Corinne Pohlmann disagrees.
Pohlmann, senior vice-president of national affairs for the Canadian Federation of Independent Business, represents more than 100,000 independent Canadian business owners. She says that according to her research, the proposed changes would have consequences — maybe unintended — for business owners in the middle class as well.
"Small business owners are pretty much almost mostly in the middle class. We know that two-thirds of small business owners make less than $73,000. In fact, four times more small business owners make less than $40,000 than make over $200,000."
A recent survey by Pohlmann's organization found that about 60 per cent of her members use income sprinkling. "This includes many that are in the $50,000 to $75,000 income range. So it's definitely going to impact those that are in the middle class," she said.
Family members often have important roles in a small business and that is why previous governments allowed this practice, Pohlmann said.
"I have never heard as much anger on a federal issue in the last 10 years in my role in Ottawa. It's quite amazing, the sort of organic backlash that occurred right across Canada."
'There's been American-style exaggeration and misinformation'
Executive director of Canadians for Tax Fairness Dennis Howlett says much of these concerns are unwarranted, as middle class business owners would not earn enough to use these strategies.
"This really does target people who make $150,000 or more. I think there's been a lot of fear mongering going on. Most small businesses really would not be affected by these changes," he said.
"There's been American-style exaggeration and misinformation, not from the government, but from the Conservative Party and from some of the business groups. They are trying to get all the small business owners on their side by making them think that they're going to be affected when in fact, they're not. While a few of them might be using these things, 87 per cent of businesses would not be affected by this measure."
While Howlett says he does support a slightly lower tax rate for small businesses, he says that the current rate is "probably already too low."
"When you get a big gap between individual income taxes, business taxes and small business tax rates, the incentive to manipulate the tax system increases."
'[A business owner's] reality is quite different than that of an employee'
The government also argues that these measures do not target Canadians in the bottom 90 per cent of earners because they are unlikely to own a personal corporation. Yet in the top 0.1 per cent of earners, 80 per cent have a personal corporation. While Pohlmann agrees that is true, she says there are those in the middle class who also have personal corporations.
"The fact remains that of all of the Canadian-controlled private corporations, the vast majority of them are actually people making far less than $150,000. Yes, there might be a larger percentage of people who are wealthy who have private corporations, but of all the private corporations that exist, most of them are making far less than $150,000," she said.
Pohlmann says beyond the proposal, business owners have also been "very upset" by how they have been characterized by the government. Members of Prime Minister Trudeau's own caucus have pointed out that the party messaging "did pit Canadians" against each other.
"This idea that somehow these were tax loopholes was implying that they were tax cheats," Pohlmann said. "I think all these things serve to anger them even more, when in fact, all they were doing was following the rules. Rules that have been in place for over 40 years because there was a recognition from previous governments that business owners take a lot of risk and their reality is quite different than that of an employee."
'We're not saying that anybody is breaking the law, we're saying the government should close [the loopholes]'
However, Howlett says that while these tax strategies are legal, it does not mean that they are fair. He says the Liberals' tax plan doesn't go far enough.
"Did you know that that richest 10 per cent actually get more than a $20,000-a-year discount on their taxes from all the different tax loopholes? Now you can call them loopholes, breaks, whatever. These are not illegal; these are in the law. We're not saying that anybody is breaking the law, we're saying the government should close them and make the tax system fair."
As some in the government warn against encouraging "class warfare," Howlett says it is important to remember the context of class in this discussion, as income inequality is growing in this country.
"The stagnant middle and lower incomes are the big reason why small business owners can't grow their business because there's not enough demand there," he said. "So the government taxing and then investing in things like daycares or public transit would actually do more to stimulate the economy and help small business — rather than a few tax breaks here and there."