Business Wants to Take Politics Out of This process – Does Minister Morneau?

Finance Minister Bill Morneau announced changes to federal tax reform proposals Wednesday in Hampton. Image: Mark Leger/Huddle

Throughout this week Finance Minister Bill Morneau – and other members of the federal government – have been announcing changes to their corporate tax planning proposals. These changes are presumably based on feedback from the small business community.

It would be difficult, if not impossible to have carefully considered the feedback received during their belated “listening tour” as well as in the 20,000+ written submissions received by the deadline two weeks ago.

Some of the announcements – such as not moving forward with reducing the capital gains exemption to protect intergenerational transfers – are positive steps to mitigate the damage that would have been caused by the original proposals.

However, given the process so far we will need to see what is in the actual legislation in order to make a judgment on the final package. In short, the entire process and the flurry of announcements this week has left us with more questions than answers.

Let us consider that process for a moment.

In response to small business’ complaint that the consultation period was far too short (and disingenuous), Minister Morneau has consistently spoken about the inclusion in their 2015 platform, the mention in the 2016 budget and the ‘panel of experts’ convened in February of 2017.

Now the government is scrambling to adjust the “unintended consequences” of their proposals. But just how unintended were they? Did the “panel of experts” lead the minister astray? Or were these consequences really intended all along until the backlash grew so intense that the “votes won/votes lost” calculus changed? Does this not make it clear that business people with boots on the ground must be included in the shaping of such proposals?

Panels of experts convened to make decisions and recommendations on business issues simply must include business owners …  those whom the changes will most impact.

Take the announcement today regarding the passive income threshold of $50,000 – the most specific change we’ve heard – but still, questions linger. If the government intended to affect the top three percent of corporations with passive income, how did they produce policy that would have affected 100 percent? How can a small business have faith in any of the government’s proposals given how badly it was botched the first attempt? Will $50,000 threshold be indexed to inflation? What happens if interest rates jump – will the threshold be adjusted? What is the higher tax rate on the income over $50K – is it the 73% rate they originally proposed?

The announcement on Monday regarding income splitting is another good example. The promise to provide clearer rules are on its face a logical proposal, but why was no detail provided? Are small businesses now being asked to ‘just trust us?’ Whatever the final proposal, we continue to be very concerned about any “reasonableness test” and asking employees of the Canada Revenue Agency to make judgment calls.

What’s reasonable in any specific situation will depend on many unique circumstances – it is not fair of the government to ask bureaucrats to administer a reasonableness test, and it is not fair for business owners to have to submit to one.

The other big news of the week was the announcement that the government intends to cut the small business tax by 0.5 percent in 2018 and 1.0 percent in 2019. We are pleased that they reversed course and decided to keep that campaign promise – but this doesn’t solve any of the issues with the proposals on the table now. Not the least of which is the fact that the rate is applied to profits (and the government sometimes seems to take issue with small businesses having those).

In the example used by the government’s backgrounder, “Victoria” runs a very successful business with a $180,000 profit. A 1.5 percent reduction in the small business tax rate will give her a savings of $2,700. Nice, right? But how much will other changes cost her? We have absolutely no idea because (a) we don’t have those details; and (b) it will still depend on circumstances.

Let’s not forget about the cost of compliance and red tape of these changes as well. Changes of this magnitude are impactful on businesses as they move forward doing business in this new tax environment not just in how they plan their business… but simply in complying to new rules and regulations.

We need to make it easier to do business, not more difficult and costly. During Small Business Week in Canada – let’s have our focus on how to improve the situation where small- and medium-sized businesses can grow and continue to employ more than 90 percent of the private-sector workforce.

All of this underscores the need for the Canadian Chamber of Commerce networks’ call for a Royal Commissions to do a legitimate, comprehensive review of the country’s tax system has never been greater.

Rather than continually making the tax code more complicated with band-aids and politically motivated measures, is it not time to step back and have a serious conversation about tax in Canada? We need a Royal Commission because it is (a) at arm’s length from governments and (b) extends beyond the life of any particular government – unlike other vehicles, once a Commission has started, the government cannot stop it.

Most importantly, a Royal Commission removes politics from the equation. Tax changes are often used for political purposes, and certainly, in this case, have been – at a minimum – divisive and contentious. Business wants to take politics out of this process – does Minister Morneau?

Krista Ross is CEO of the Fredericton Chamber of Commerce, a nationally accredited organization with nearly 1,000 members, is an active business organization engaged in policy development and advocacy that affects the competitiveness of our members and the Canadian business environment. The Chamber’s vision is ‘Community Prosperity Through Business.’

Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle.