Dear Hon. Bill Morneau,
On July 19th, the Ministry of Finance opened a Consultation on Tax Planning Using Private Corporations. Soon after, MP Murray’s office was inundated with phone calls, emails, letters and walk-ins from constituents expressing their concerns over the proposed income tax changes.
Originally, MP Murray accommodated meeting requests and phone discussions on the issue. However, as the amount of requests outgrew our capacity to schedule meetings, our office opted to hold a “Policy Café” on September 14th on the proposed tax changes.
The Policy Café style provided the audience with key questions on the policy changes, and asked for discussion to be had in groups. Participants were able to post their points on post it notes and place these notes at the front of the room. After the discussion of the three questions, a question and answer period was opened to the floor and participants were able to ask questions directly of MP Murray.
From the Policy Café, which drew over 150 participants, our office gathered 160 written comments and 15 oral comments from the concluding Q&A period. Further, comments, concerns and suggestions were gathered from the 700+ pieces of written correspondence that our office received, as well as numerous phone calls.
Concerns, comments and suggestions came largely from small business owners, doctors, lawyers and tax planning consultants who live and/or work in the riding. Concerns were raised about a wide variety of aspects of the proposed tax changes, however there were a few areas that received more attention than others.
One primary concern was that the tax changes could have an extremely detrimental impact on incorporated individuals who have traditionally used passive investment income to save for retirement, and insulate themselves against risk. It was repeatedly noted that incorporated individuals do not have access to the benefits that some salaried members of society have, and that their ability to use the small business tax rate on income earned by their business was perceived as a means of creating fairness. There were several people who suggested if these changes were imposed, increasing RRSP limits would help to mitigate this loss of retirement income.
Another primary concern raised was the length and timing of the consultation period. Many argued that the consultation period was too short for meaningful discussion as it was held over the summer when many people are away. Our office has received repeated calls for an extension to the consultation period for further discussion and to allow for better understanding and analysis of the proposed changes.
Several small business owners also expressed strong feelings over the ability to pay their spouses from within a corporation. They argued that although their spouses were not directly involved in the business, the ability to take care of children and support the sacrifices made while growing their business was critical to their success.
Finally, many of those who contacted our office believed the Government’s messaging on the corporate and income tax changes to be both offensive and confusing. Offense has been taken by the implication that those who use the tax planning strategies in question are tax cheats, or tax manipulators, who are using loopholes to avoid paying their fair share of tax. Offense has also been taken to the idea that those who could be affected by these changes are wealthy, or not middle class. Others noted that the tax changes were not communicated clearly enough even for professionals in the tax planning field to fully understand, and that this factor makes a proper consultation difficult.
There have been numerous other critiques and suggestions, and the most repeated comments have been listed below.
It is also important to note that, though a clear minority, a number of constituents from the small business and medical fields wrote in to express their support for the income tax policy changes. The most common rationale for the stance of those in support was that they never had to resort to these tax planning strategies and did not feel that these strategies were necessary in order to achieve their personal goals. Others noted a moral opposition to avoiding paying personal income tax on income that they felt should be taxed at the personal rate.
In conclusion, our office received strong opposition to these proposed tax changes. The most prominent comments were about fairness between incorporated and salaried individuals, arguing for a longer consultation period, and better communications from the Government to avoid offensive rhetoric and to provide clearer understanding of the proposed changes to the current rules of the Income Tax Act.
I expect that this report and summary of our consultation with the constituents of Vancouver Quadra will play an important role in the Ministry’s nationwide consultation on the proposed income tax policy changes.
Joyce Murray, MP
Correspondence and Policy Café Summary
Most Common Comments, Suggestions and Critiques
- The consultation period was not long enough, and was held at an inopportune time for genuine discussion.
- The consultation period’s timing and length suggest that the Government was not truly interested in discussing the issue.
- The Prime Minister’s and the Finance Minister’s comments during the consultation period suggest that a decision has already been made on the tax proposals.
- The proposals were never clearly explained with even tax planning professionals had a difficult time understanding the changes. It is very difficult to have a proper consultation on a technical issue, in a short time frame, without the problem and policy changes to address the problem being clearly explained.
- The Government’s communication on this is unfairly attacking small business owners and doctors as tax cheats or people manipulating the tax system at the expense of the middle class.
- The Government is unfairly using the term loophole to characterise what has traditionally been a fully legitimate method of tax planning.
- The Government’s communications on this issue is dividing people and starting a class war.
- The Government’s communications wrongly identifies small business owners as the 1% and rich elite.
Salaried v. Incorporated Individuals
- Small business owners take on risks that salaried employees do not. Taxing incorporated individuals at the personal tax rate greatly impedes their ability to shelter themselves from risk.
- Small business owners and doctors do not receive pensions, maternity leave or other benefits that salaried employees receive. The ability to shelter passive investment income in corporations is the only means available to small business owners to save for retirement, disability, medical/dental bills.
- The original intent of the small business tax and incorporation for individuals was to offset incurred risk and the benefits that they would otherwise receive as salaried employees.
Risks to Canada
- These policy changes risk driving talented people and entrepreneurs away from Canada. These people drive growth in Canada, and the repercussions of this loss of talented people will be felt.
- Doctors may be forced to turn away patients, lay off employees, or leave Canada entirely.
- Small business owners, doctors and lawyers may need to let go of staff to accommodate for the tax policy changes.
Passive Income Investment
- Passive income already gets taxed at the personal rate on the way out. These tax changes will result in the income being taxed twice at the personal tax rate.
- Doctors spend many years in school and accumulate massive student debt. They begin earning savable income far later in life than salaried employees, and passive income in corporations is their only means of catching up.
- Female doctors are not entitled to maternity or sick leave, like salaried employees. Due to their long hours, they must pay for a nanny to care for their children, and passive investment income helps with that.
- The incentives for doctors to work longer hours will be gone if these tax changes go through.
- We have a shortage of doctors, and these tax changes will discourage young Canadians from wanting to become doctors in the future.
- Spouses will often make great sacrifices with their career in order to stay home with children to support a small business owner. Eliminating the ability for small business owners to pay their spouses who do not directly work for the business unfairly attacks those who make great contributions to the business in less direct ways.
- This is an attack on the traditional one income family, limiting the one spouse’s ability to share his/her income with his/her spouse.
- Many small businesses fund their children’s education through income splitting. These tax changes will unfairly target those who have used income splitting for this reason.
Taxation on Capital Gains
- These tax changes will make it easier to sell your business to a stranger than it will be to your own family.
- Leave the tax system as it is, it is working as intended.
- Greatly raise the RRSP contribution limit.
- Create a pension plan for doctors and small business owners so that they can receive the same benefits that salaried employees do.
- Extend the consultation period to allow for greater time to discuss and understand the proposed changes.
- Rework tax policy changes to go after the real 1%.
- Rework tax changes to include public corporations and trust funds.
- Rework tax changes to include income splitting for seniors.
- Tax families as a unit, not as individuals.