The Senate Standing Committee on National Finance passed through Saint John last week, part of their hearings on the controversial tax changes put forward by the Trudeau government.
Prime Minister Trudeau and Finance Minister Bill Morneau claim these changes are needed because taxes are not applied fairly in Canada. They’re right, but not in the way they think.
Their argument is premised on the idea that tax rules favour self-employed people who can income split with family members and accumulate investments inside their privately-held Canadian-owned corporation. So people like small business owners, doctors, accountants and dentists.
In fact, the opposite is true.
An analysis by my financial advisors found that, all things being equal, a salaried employee earning the same income and living the same lifestyle as a self-employed person, who income splits and accumulate investments inside a corporation, comes out significantly ahead over time.
They took a look at a dentist graduating from university today. She would have spent about $300,000 just for her dental degree. If she wanted to start her own practice, or buy an existing one, she would need to spend a further $500,000.
So she is $800,000 in debt before she earns her first dollar.
Running a dental practice is like running a small hospital. She needs to pay for staff and their benefits, rent, utilities, snow removal, lawn mowing and much more. Dentistry is expensive to deliver and she must pay for infection control, technological advancements, equipment replacement, digital radiography, professional licensure and more.
What happens if she wants to have children? The majority of dentists graduating from dental school are female.
Because she is self-employed, she does not qualify for maternity leave. So she must either take only a few weeks leave or take a leave of absence without pay and find, and pay, another dentist to run her practice while she stays home with her baby.
So having children becomes a choice of sacrificing time with that child or incurring more debt. No woman should have to make a choice between having a career or having a family.
As a self-employed person, she does not get benefits paid for in part by a company, she does not get CPP and she does not even qualify for Employment Insurance. Those payments add up significantly over time for a salaried individual.
She has no pension plan beyond what she saves on her own. No one else – not an employer or government – contributes to her retirement savings.
Based on both earning $150,000 per year with the same lifestyle spending, the analysis found that the salaried employee will have savings of $4.3-million at age 60, compared to only $1.4-million for the self-employed dentist.
The dentist will run out of savings by age 70 while the salaried employee will pass on an inheritance to their children.
This is all under the current plan. Under the changes proposed by the federal government, a bad situation will become worse.
Business owners hold their savings inside the business. They do this to fund growth, cover slow months in the business and save for their retirement. This isn’t some sketchy tax dodge, as Minister Morneau implied. Any income they make on their retained earnings is taxed at 52.7 percent in New Brunswick – this is the “low-rate” that Morneau loves to quote.
The federal government wants to limit that savings to one million dollars, or $50,000 of investment income per year. That seems like a lot of money, but it you are responsible for a staff of 10 people, or more, it doesn’t go far. If you want to open a new office or create a new product, one million dollars is rarely enough.
The new rules will mean anything earned above $50,000 will be taxed at 73 per cent by the time it gets into the owner’s hands. So the government is forcing people to take out cash that should be kept in the business to help it grow, or help it survive during difficult times.
The government also wants to change income splitting. Right now a dentist can split the dividends she takes with her spouse or adult children. Owning a business is always a family endeavour – they certainly share in the risk of failure. This change is apparently going to begin on January 1, 2018 – that’s six weeks away – and we don’t yet know the details of how this will work.
So Trudeau and Morneau are right – our current tax system is unfair. But they want to make it worse by increasing the discrepancy between salaried employees and self-employed people.
What will this achieve? It will hurt our economy.
What business owner wants to pay 73 percent tax? Why would someone start a business and endure its ups and downs when they would come out much further ahead as an employee of a big company.
So a young dentist graduating today would have to look at moving to another country to practice. So would a doctor or a business owner.
We live in an increasingly mobile world. People, and money, can move easily. If the federal government moves forward with these ill-advised changes, everyone will suffer.
The federal government tried to rush through these changes during the height of summer vacations. This is vitally important. Instead of trying to sneak through new rules, we should create a Royal Commission that can review the entire tax system without political rhetoric and with a goal to create true fairness.
Let’s take the time to get this right.
Dr. Kelly Manning is a Saint John dentist.
Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle.