Planned tax changes pit lawyers, bar association on opposing sides

Posted on September 26, 2017 in Governance Debates – ROB/Small Business/SB Money
September 26, 2017.   

Ottawa’s proposed tax changes for private corporations have created a rift in Canada’s legal community and are refuelling a debate over whether lawyers are public servants, based on a professional oath, regardless of what type of law they practice.

The issue arose after the Canadian Bar Association (CBA) recently took a position against the Liberal government’s proposed tax reforms, arguing they will hurt small businesses, including some smaller law firms across the country.

How the Liberals want to change the tax code – and why

The Trudeau government is proposing to remove what it says is a financial advantage people with corporations have over salaried employees. Owners of private corporations can use them for income sprinkling among relatives to lower their family tax bills and can benefit from the low small-business tax rate to have more money to invest back into their businesses.

Some lawyers are upset the CBA has taken the anti-government stance and started a petition in favour of the tax reforms, saying the association doesn’t speak for them.

Chris Rudnicki, a criminal-defence lawyer and partner with Rusonik O’Connor Robbins Ross Gorham & Angelini LLP in Toronto, cancelled his CBA membership in protest, citing the oath lawyers take to uphold justice.

He says lawyers should support reforms that create more tax fairness, regardless of what type of law they practise or if they’re incorporated or a salaried employee.

“In my view, lawyers are fundamentally public servants,” Mr. Rudnicki said. “We agree to act in the public good. We can’t, on the one hand, invoke the language and ideal of justice, while on the other say we shouldn’t pay our fair share.”

Mr. Rudnicki said his view is supported by both salaried lawyers and some who have their own corporations.

A petition is also circulating in the legal community in favour of Ottawa’s tax reforms and against the CBA’s position.

“We lawyers – myself included – are a privileged group, and I am uncomfortable with the CBA leveraging that privilege to advocate for the personal financial benefit of a few,” said Emily MacKinnon, a lawyer at McCarthy Tetrault LLP, who started the petition. “The CBA’s job is to advocate for things that affect lawyers as lawyers, not to act as a tax lobby group.”

The petition said the proposed reforms would affect “only a relatively small proportion” of lawyers who are equity partners or sole proprietors , while salaried associates, government lawyers and in-house counsel have no financial interest in t he issue.

Ray Adlington, vice-president of the CBA, said he’s not surprised there is some dissent over the association’s position, given that it has more than 36,000 members. He said the CBA took its position because of the negative impact it will have on small business and its belief that the consultation period – until Oct. 2 – isn’t long enough.

“Yes, some lawyers are affected, but this is not simply about protecting lawyers’ own interest,” said Mr. Adlington, who is also a partner in the Halifax office of McInnes Cooper.

In fact, he thinks the tax changes will create more business for law firms in the near term as they help clients navigate the changes. However, it could hurt some firms down the road, especially smaller ones, if fewer companies incorporate as a result of the changes.

“That will have an impact on law firms that do that type of work,” said Mr. Adlington, especially small firms and solo practitioners in smaller towns and rural areas. “When those lawyers are affected it becomes an access to justice issue” if the changes cause them to close their practice.

Dave McNairn, a lawyer and partner at Hicks Lemoine Law in Amherst, N.S., said the proposed tax changes will have “a chilling effect” on some small businesses. That, in turn, could affect his general law practice, which works with companies in and around the town of about 10,000 people.

“My fear is that, with the proposed changes, that type of work will dry up. If there’s no tax incentive to incorporate a small business, that takes work off of lawyers’ plates,” said Mr. McNairn, who said he will be the most affected among the lawyers in his firm, with small-business clients representing between 20 per cent and 25 per cent of his billings.

If the changes go through as proposed, Mr. McNairn expects to see a drop in his earnings, which may affect his ability to pay down debt and save for retirement longer term.

“I would try to adapt to it and try to do things in other areas, but once you’ve established a reputation in a certain area of law, it’s not like you can … suddenly replace that income overnight, if at all,” Mr. McNairn said. “Eventually people will adapt, but in the short term and the intermediate term, there will be a significant loss of income for accountants and lawyers where this type of work makes up a significant portion of their billings.”

He hopes the changes won’t be as drastic as the government is talking about, but “we’ll have to be ready for it.” For him, that may mean going beyond Amherst for clients, which could be a challenge, moving away from the town where he was born, or even a career change.

“I’ve been practising since 2004, so I’m 13 years in now. It’s not a comforting thought to potentially be thinking of changing career paths at this point,” he said.

If lawyers, accountants and doctors affected by the tax changes move or leave their profession, it would also be a blow to small towns already struggling with access to professional services, Mr. McNairn said.

“Anything that the federal government does that discourages these professionals from settling in small towns I think is a really bad thing,” he said. “Will it have that effect? I don’t know, but I think it could.”

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