Bill Morneau should refine tax proposals, then look at larger reform
TheStar.com – Opinion/Editorial – There are steps the finance minister can take to guard against unintended consequences of his proposals, tamp down the current controversy and protect the larger project of tax reform.
Oct. 2, 2017. By Star Editorial Board
It’s been more than 50 years since the Carter Commission, the last time Ottawa took a comprehensive look at our tax system. Since that time, Canada’s tax code has expanded exponentially in an often thoughtless, piecemeal fashion, one politically micro-targeted tax break after another. We’ve lost track of whether our tax system is doing the job it is intended to do.
As the Star has argued before, at a time of slow growth and ballooning debt, amid declining trust in government and rising concerns about inequality, it is essential that Ottawa take another look.
It would be profoundly perverse, therefore, if the fiasco of the Trudeau government’s small-business tax tweaks were to jeopardize the larger project of reforming Canada’s tax system.
The tax changes now on the table are based on the sound principle that the small-business tax system should help small businesses thrive and grow, not allow high-earning individuals to reduce how much they pay. As we argued in this space on Saturday, much of the noisy opposition to these changes is misplaced and overblown, the inevitable outrage of those being asked to pay more.
Yet rather than anticipate and manage the entirely predictable blowback, including some legitimate concerns of those affected, the government has, in its tone-deaf rollout, turned a surmountable obstacle into a major political headache. The result is that it has endangered the sensible goals of the measures now being floated and, far more important, the needed larger reforms.
Critics, and in particular the doctors and other incorporated professionals who are the primary target of these changes, can be forgiven for pointing out the obvious irony of a tax-reform package put forward in the name of fairness that seems arbitrarily to target them.
Surely these changes would have been easier to swallow had they been part of a holistic tax reform agenda, guided by clear principles. However laudable the current objectives, those affected might understandably wonder, why us? Especially when Morneau has inexplicably chosen to start with the complex, almost surgical task of attempting to protect the business benefits of incorporation, while curtailing the unintended costs that contribute nothing to growth. And especially when there are so many more costly and regressive loopholes still on the books.
This communications misstep was, of course, compounded by the government’s ill-considered rhetoric of fighting tax dodgers, which unnecessarily vilified those who were simply using the system that was given them.
Finance Minister Bill Morneau cannot undo the launch. The framing of these reforms has been irredeemably botched. But there are steps Morneau can take both to tamp down the current controversy and protect the larger project of tax reform.
He can begin by ensuring the upcoming legislation addresses several legitimate concerns that have arisen over two months of public consultations.
The current reforms, for instance, make it hard for the family farm and other businesses to stay in the family. The government can fix this by exempting intergenerational business transfers, such as the sale of a farm from parent to offspring, from its proposed ban on so-called surplus stripping, a sophisticated tax-avoidance scheme that involves transforming income into capital gains.
As designed, the proposal would make it more expensive for, say, a farmer to sell their farm to a family member than to an outsider. The government has repeatedly said that is not what was intended. It should make clear how the legislation will protect family businesses.
The government has also failed to address the lack of clarity around who will ultimately be able to use income splitting, a practice that allows incorporated individuals to significantly reduce their tax burden by transferring portions of their income to family members. The government aims to limit income splitting to only those family members who actively contribute to the company.
But, especially for a family business, determining who qualifies is far from simple. The government has suggested a reasonableness test, a measure often used in the tax code, but some critics worry that this subjective test will create uncertainty for taxpayers and chaos in the courts. The government has an obligation to make as clear as possible in the legislation who qualifies and who does not.
Then there’s the issue of retroactivity. The surplus-stripping ban, for instance, would be retroactive to July 18, when the reforms were announced. But this would capture transactions that were mid-process at the time. People should not now be punished for decisions they made that were consistent with the law when they made them. More generally, many of those affected by Morneau’s proposals have made financial decisions around the existing rules. Given the impact of these reforms, the government might also consider whether phasing-in or grandfathering some of the changes might be a fairer approach.
Upon taking office, Morneau promised to save $3 billion annually by closing ineffective and unfair tax loopholes. The current changes would get us, at most, a sixth of the way there. Can you imagine the finance minister going through five more firestorms like this?
He shouldn’t. But nor, as his government continues to rack up debt and make lofty promises about addressing inequality, can he stop here. Morneau is right that our tax system needs fixing. But he doesn’t seem to know how. Let this disastrous start be a lesson that it is better to do the hard work of creating a comprehensive strategy, guided by clear principles, than to fight one costly battle at a time.
https://www.thestar.com/opinion/editorials/2017/10/02/bill-morneau-should-refine-tax-proposals-then-look-at-larger-reform-editorial.html
Tags: economy, featured, ideology, tax
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