Liberals should pause, or delay, tax changes: senators

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This article was published 12/12/2017 (2325 days ago), so information in it may no longer be current.

OTTAWA — Senators are urging the federal government hit the brakes on its controversial tax changes, while echoing Manitoba’s calls to take a longer, comprehensive reform of Canada’s labyrinthine tax laws.

Instead, the Liberals released more details Wednesday on a proposal that will take effect Jan. 1, amid continuing anger from the small-business community.

“There was never a clear indication as to what perceived problem the federal government was trying to address with these measures,” said Loren Remillard, president of the Winnipeg Chamber of Commerce.

“For the business community, this appeared to be a case of a solution in search of a problem.”

The chamber was among dozens of groups who testified to the Senate finance committee this fall.

On Wednesday, that committee published its report, after speaking with 138 witnesses at 30 meetings across the country, including a Nov. 9 meeting in Winnipeg.

The report recommends the government shelve its reform and instead take a comprehensive dive at clarifying Canada’s sprawling tax law, as other countries have done.

“The income tax act is a mammoth, huge thing; it is also a strange animal, so it’s something that has to be approach with great care, great knowledge and great tenacity,” Sen. Anne Cools told reporters Wednesday.

If the Liberals still proceed, the committee said they should at least wait until 2019, so business owners can better understand the new rules and modify their business plans.

Conservative Sen. Percy Mockler said the committee reached an “inescapable conclusion” there’s “too much uncertainty and too much confusion” to push through a tax change by next month.

Yet on Wednesday, the Liberals announced a tweak to a proposal that would tighten existing rules that enable small-business owners to lower their tax burden, by distributing earnings among family members who do not make significant contributions to their companies — a practice known as income sprinkling.

It’s the government’s latest adjustment to its overall tax-reform package, following an onslaught of complaints from doctors, lawyers, accountants, tax experts, farmers, premiers and even some Liberal backbenchers.

That criticism prompted the Senate to approve a cross-country tour for its finance committee.

In Winnipeg, the committee heard from provincial Finance Minister Cameron Friesen, who said Ottawa should more or less repeat the 1960s Royal Commission on Taxation, which spanned four years.

“What is truly required, if we’re going to embark on this path, is an independent tax-reform commission… one that has the resources sufficient to take on a comprehensive examination of who we are as Canadians,” Friesen told the committee.

Remillard agreed, saying anything short of a thought-out, in-depth reform will backfire on Manitoba businesses. “The current tax structure, before these proposals, was operating well.”

The Senate committee consists of five Conservatives, five independents and two Independent Liberals – two Quebec senators appointed by Prime Minister Justin Trudeau declined to support the call for the whole tax plan to be withdrawn.

Though no Manitobans sit on the finance committee, Saskatchewan Sen. Raynell Andreychuk said the tax changes are especially important for the Prairie provinces.

She says provinces such as Manitoba are building economies that don’t rely too heavily on commodity prices, largely due to small businesses.

“That this is where the jobs and the growth are,” she said in an interview. “A lot of the value-added stuff we’re doing are done by the small guy who works in his company; they are the backbone.”

Andreychuk said farms and small businesses are allowed to share their tax burden because they drive economic growth. “It’s not equal. When you’re running a small business, it’s risk; it involves your whole family. And the tax system was built on that.”

She gave the example of farmers saving for post-secondary education, so their children can use technology to sell higher-cost, processed goods.

“That’s why we’re competitive now, around the world. We’ve learned a lot about agriculture… and all the spin-off industries that agriculture supports.”

The Liberals insist Wednesday’s changes will clarify income-sprinkling rules, by spelling out a “reasonableness test” to assess whether a relative has made meaningful contributions or investments into the family business.

Trudeau said the modified income-sprinkling proposal would only have an impact on three per cent of all small businesses in Canada — and even those affected would still be able to continue sprinkling their income, as long as it’s for legitimate reasons.

For example, the adult son of a doctor or farmer would have to work for at least 20 hours per week, or about 1,000 hours per year, in order for the parent to sprinkle income on their son and thus lower the tax rate.

A coalition of industry associations, including a national group representing small- and medium-sized businesses, has criticized Ottawa for waiting until a couple of weeks before the end of the year to provide clarity on the tax changes, which will take effect Jan. 1.

Remillard said he’s still not clear on how the changes will work, and suspects the changes are driven by the federal deficit.

The political and business-sector backlash over Bill Morneau’s suite of tax proposals, which he released in the middle of the summer, dogged the federal finance minister for months.

In hope of soothing its critics, the government announced in October it would abandon an element of the income-sprinkling proposal that would have limited access to the lifetime capital gains exemption. Morneau said he made the change to avoid unintended negative impacts on the intergenerational transfer of family businesses, such as farms.

Morneau said the goal of the change was to enable small-business owners to sock away money inside their corporations for future business-related needs, while still targeting wealthy people who use their corporate structures purely as a way to reduce their taxes.

Andreychuk said the changes to how doctors are taxed could have implications for rural health care in Manitoba, with doctors eyeing better lower taxes abroad.

She recalled people crying during the committee testimonies. (During the Senate’s travels, transcripts of their meetings are available, but not audio or video recordings.)

“People were in tears saying, ‘I’m not a tax cheat, and I don’t want to do the wrong thing Jan. 1; I want to follow the laws but I don’t know what the rules are,'” she recalled. “The way that they attacked it have left such a bad taste in everyone’s mouth.”

The government will release draft legislation as part of next year’s budget.

– with files from The Canadian Press

dylan.robertson@freepress.mb.ca