Election promises: Tax cuts for many—and tax hikes on the rich

Election promises: Tax cuts for many—and tax hikes on the rich
Tax credits aren’t the only tax issue on which the Conservatives say they want to undo what the Trudeau government did. The Tories are also promising to roll back some of the Liberals’ small-business tax changes that caused an uproar among entrepreneurs and self-employed professionals in 2017.

The Conservatives are pledging to go back to allowing small businesses to pay the small-business tax rate on passive income of more than $50,000 a year. They’re also proposing to exempt spouses and common-law partners of small-business owners from revised Liberal rules designed to limit so-called income sprinkling, which consists of sharing business income among family members — whether or not they’re involved in the company — through dividend payments.

The Trudeau government and several economists argued the old tax rules allowed high-earning self-employed professionals who structure their business as a small corporation to lower their income tax burden.

Finance Minister Bill Morneau first proposed the small-business tax changes in 2017 but tweaked some of them in 2018 after fierce pushback from the small-business community. But critics say even the more modest rules that were eventually adopted should be scrapped.

The CFIB’s Kelly says the Liberals’ new limits around passive income make it harder for entrepreneurs to have the ability to build a rainy-day fund for their business. He also argues that restrictions on income sprinkling are unfair because spouses and family members inevitably share in risks that come with setting up and running a small business — whether or not they work for the company.

The Liberals’ tax changes also unnecessarily complicate the tax code, adding red tape for small businesses to wade through, Kelly said.

Smart, on the other hand, is highly critical of the Conservatives’ intention to set the clock back on the small-business tax changes.

In a recent paper, he found that when the Trudeau government increased income taxes on those making more than $200,000 a year, many high-income Canadians were able to dodge the immediate effects of the hike thanks to manoeuvres that reduced their taxable income. That was especially true of small-business owners, according to Smart.

“These are not struggling small-business owners,” he said. “We’re talking about the richest one per cent of Canadians who have very substantial assets in their private corporations, and the [Liberal] government was making an attempt to make sure our [tax] system would work fairly for all Canadians.”

The Conservative proposal to reverse those changes “serves no economic purpose” and amounts to “a tax reduction that’s targeted at the richest,” Smart said.

Ipsos Public Affairs CEO talks about election polling

Ipsos Public Affairs CEO talks about election polling

Some of Canada’s top earners may welcome the Conservatives’ promises on small-business taxes, but most of the country’s wealthiest families won’t like much of what the other parties are proposing.

One of the few tax increases mentioned by the Liberals so far, for example, is a new 10 per cent tax on purchases of cars, boats and personal aircraft worth over $100,000.

The New Democrats want to increase the tax rate on top income earners by two percentage points. The NDP and the Greens are proposing a new one per cent levy on families with wealth worth over $20 million. Both parties are also eyeing higher taxes on capital gains, the profits from the sale of assets like a second home or investments.

Currently, only 50 per cent of the value of capital gains is subject to tax. The NDP wants to raise that to 75 per cent, while the Greens want to bring it to 100 per cent for large corporations and individuals with a net worth over $3 million.

The Parliamentary Budget Officer (PBO) has reviewed the Liberals’ luxury tax, the NDP’s wealth tax and the Greens’ capital gains tax changes. While Trudeau’s tax on supercars, yachts and private jets would raise a mere $600 million a year, the wealth tax could bring in around $6 billion a year, while the Green version of the capital gains tax hike could boost revenues by $12 billion per year.

However, all three of the PBO estimates come with a “high degree of uncertainty” due in part to the likelihood that Canada’s wealthy will find ways to avoid or reduce the impact of the tax, according to the documents.

“You definitely have to write strong legislation and you’d have to keep updating it,” said the CCPA’s Macdonald.

But Ottawa could learn from the experience of other countries, especially when it comes to taxing wealth, something that would be new in Canada.

Macdonald believes targeting family fortunes has become increasingly important to tackle inequality, as wealth — unlike income — accumulates generation after generation.

“It’s incredibly concentrated,” Macdonald said.

The wealth tax as the NDP would structure it, he said, would target only about 6,000 families in Canada who would pay it. Around half of the tax would be paid by just the top 100 richest families in the country, which have over $1 billion in wealth each, he said.

Canada’s richest people 2018

Smart, however, said introducing a new kind of levy such as the wealth tax would likely pose “a whole new set of problems and create a whole new set of opportunities” for tax avoidance.

For example, he said, it’s already “very hard” to tax wealth that is held offshore.

“The government’s information about the value of those assets is very limited today,” he said.

Instead, Smart said there is an argument for increasing taxes on capital gains.

“There are so many big loopholes within our system, particularly in the taxation of corporate income and capital gains income,” he said.

But raising the capital gains inclusion rate would have to be done “carefully” and “in concert with other measures” to minimize the creation of new loopholes and avoid discouraging business investment, Smart said.

“But the basic principle of taxation is that a dollar is a dollar,” he said. “Why would we tax one form of income — capital gains — at half the rate of ordinary income?”
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