Why Morneau's tax changes are anything but neutral
Great piece by Pierre Poilievre in the Ottawa Citizen about Justin Trudeau’s tax hikes.
“The real purpose of these proposals: to fulfil the insatiable spending appetite of the Justin Trudeau government, not the fair treatment of taxpayers.”
For decades, economists and public finance experts have dreamt of a neutral tax system. No more “loopholes,” preferences or favouritism. As the argument goes, everyone with the same income should pay the same tax. Finance Minister Bill Morneau’s recent Globe and Mail article entitled “Tax Changes are about levelling the playing field” claimed he was doing just that.
In fact, he is doing the opposite, with new rules and higher tax rates targeting certain taxpayers (private businesses) and not others (high-income personal tax-filers and publicly traded companies).
Take the government’s plan to increase taxes on passive investment income earned inside a company. Before these new proposals, passive investment income was taxed at a total tax rate of about 55 per cent, regardless of whether it was earned as an individual, in a publicly traded company, or in a privately owned business. While that rate is high, at least everyone paid the same amount.
Not anymore. The government now proposes to double-tax private companies’ passive investment income: once in the hands of the business and again in the hands of its owner. On a dollar of investment income the business would pay 50 per cent (leaving 50 cents) and the business owner would pay another 45 per cent on the remainder (leaving just 27 cents). That is a 73 per cent tax — a third higher than the 55 per cent that either wealthy individual tax-filers or large publicly traded companies will pay.
No problem, some say; the small business or farmer can simply save money in a tax-deferred RRSP instead of within the company. But RRSP penalties on early withdrawal make it impossible to access those dollars in the event of a business emergency (a lawsuit, a plunge in sales, a farm flood or a crop infestation, for example).
Saving within the company makes the money available for those purposes. The government claims there is a deferral of taxation on the difference between the business tax one pays upfront and the remainder of the personal income tax paid on withdrawal. But, so what? The full tax bill gets paid in the end anyway, so the government is no further behind. In fact, by letting it grow inside the company for a few years, the total amount of money taxed is larger, so the government gets more in the long run.
That is the deal that large, publicly traded businesses will continue to have, so why target private businesses with unique new penalties?
Farmers are also targeted. Most dream of selling their farms to the kids so they can carry on the tradition. Yet the proposed changes are biased against the farm family in three ways.
First, selling the farm to the children will mean higher taxes than selling it to a stranger. Imagine a retiring farmer sells his farming company to his children for $500,000. The kids do not have the cash, so they form a holding company, buy their father’s shares, and provide a promissory note to pay him out using future farm earnings. Minister Morneau’s amendments to section 84.1 of the Income Tax Act would tax the $500,000 at the dividend rate of 45 per cent, instead of the lower capital gains tax rate, because the seller (the parents) and buyer (the children) are “non-arms length.”
However, if an unrelated entity (such as a multinational asset manager) were to buy the farm as a real-estate play, it could pay out the same $500,000 promissory note tax-free to the farmer. That means the asset management firm could have a 45 per cent or $225,000 tax advantage compared to the farm kids when bidding for mom and dad’s farm company. This massive new distortion will mean the end of the intergenerational family farm in just a few decades.
Second, the government’s new “income sprinkling” rules will mean “farm spouses need to begin recording all their contributions to the farm in case the taxman decides they aren’t contributing as much as they are trying to take,” according to the Western Producer. Not only does this mean the impossible task of recording every minute of informal and immeasurable work a farm spouse does, it is a paper burden that publicly traded farm corporations will not face.
Third, according to Moodys Gartner Partner Greg Gartner, farmers wishing to retire by renting out farm land held in the family company, will pay 73 per cent tax on this so-called “passive income,” making them uncompetitive with publicly traded competitors who will pay a total of 55 per cent on such passive income.
Simply put, those dreaming of a perfectly neutral tax code with no preferences or favouritism will have to dream on, because Minister Morneau’s proposals are a nightmare of distortions, targeted tax hikes and uneven treatment.
Which brings us to the real purpose of these proposals: to fulfil the insatiable spending appetite of the Justin Trudeau government, not the fair treatment of taxpayers. The Liberals’ deficit spending can’t wait for taxes to be paid in the long run; they need to find a way to make small businesses pay for it today.
Hon. Pierre Poilievre is the MP for Carleton and finance critic in the Conservative shadow cabinet.
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