Royal​ ​Commission​ ​Needed​ ​to​ ​Review​ ​Taxation​ ​in​ ​Canada

Throughout​ ​this​ ​week​ ​Finance​ ​Minister​ ​Bill​ ​Morneau​ ​-​ ​and​ ​other​ ​members​ ​of​ ​the​ ​federal​ ​government​ ​- have​ ​been​ ​announcing​ ​changes​ ​to​ ​their​ ​corporate​ ​tax​ ​planning​ ​proposals.​ ​These​ ​changes​ ​are presumably​ ​based​ ​on​ ​feedback​ ​from​ ​the​ ​small​ ​business​ ​community.​ ​​ ​It​ ​would​ ​be​ ​difficult,​ ​if​ ​not impossible​ ​to​ ​have​ ​carefully​ ​considered​ ​the​ ​feedback​ ​received​ ​during​ ​their​ ​belated​ ​‘listening​ ​tour’​ ​as well​ ​as​ ​in​ ​the​ ​20,000+​ ​written​ ​submissions​ ​received​ ​by​ ​the​ ​deadline​ ​two​ ​weeks​ ​ago.

Some​ ​of​ ​the​ ​announcements​ ​-​ ​such​ ​as​ ​not​ ​moving​ ​forward​ ​with​ ​reducing​ ​the​ ​capital​ ​gains​ ​exemption​ ​to protect​ ​intergenerational​ ​transfers​ ​-​ ​are​ ​positive​ ​steps​ ​to​ ​mitigate​ ​the​ ​damage​ ​that​ ​would​ ​have​ ​been caused​ ​by​ ​the​ ​original​ ​proposals.​ ​However,​ ​given​ ​the​ ​process​ ​so​ ​far​ ​we​ ​will​ ​need​ ​to​ ​see​ ​what​ ​is​ ​in​ ​the actual​ ​legislation​ ​in​ ​order​ ​to​ ​make​ ​a​ ​judgment​ ​on​ ​the​ ​final​ ​package.​ ​In​ ​short,​ ​the​ ​entire​ ​process​ ​and​ ​the flurry​ ​of​ ​announcements​ ​this​ ​week​ ​has​ ​left​ ​us​ ​with​ ​more​ ​questions​ ​than​ ​answers.

Let​ ​us​ ​consider​ ​that​ ​process​ ​for​ ​a​ ​moment.

In​ ​response​ ​to​ ​small​ ​business’​ ​complaint​ ​that​ ​the​ ​consultation​ ​period​ ​was​ ​far​ ​too​ ​short​ ​(and disingenuous),​ ​Minister​ ​Morneau​ ​has​ ​consistently​ ​spoke​ ​about​ ​the​ ​inclusion​ ​in​ ​their​ ​2015​ ​platform,​ ​the mention​ ​in​ ​the​ ​2016​ ​budget​ ​and​ ​the​ ​‘panel​ ​of​ ​experts’​ ​convened​ ​in​ ​February​ ​of​ ​2017.​ ​Now​ ​the government​ ​is​ ​scrambling​ ​to​ ​adjust​ ​the​ ​‘unintended​ ​consequences’​ ​of​ ​their​ ​proposals.​ ​But​ ​just​ ​how unintended​ ​were​ ​they?​ ​Did​ ​the​ ​‘panel​ ​of​ ​experts’​ ​lead​ ​the​ ​minister​ ​astray?​ ​Or​ ​were​ ​these​ ​consequences really​ ​intended​ ​all​ ​along​ ​until​ ​the​ ​backlash​ ​grew​ ​so​ ​intense​ ​that​ ​the​ ​‘votes​ ​won​ ​/​ ​votes​ ​lost’​ ​calculus changed?​ ​Does​ ​this​ ​not​ ​make​ ​it​ ​clear​ ​that​ ​business​ ​people​ ​with​ ​boots​ ​on​ ​the​ ​ground​ ​must​ ​be​ ​included​ ​in the​ ​shaping​ ​of​ ​such​ ​proposals?​ ​​ ​Panels​ ​of​ ​experts​ ​convened​ ​to​ ​make​ ​decisions​ ​and​ ​recommendations​ ​on business​ ​issues​ ​simply​ ​must​ ​include​ ​business​ ​owners…​ ​those​ ​whom​ ​the​ ​changes​ ​will​ ​most​ ​impact.

Take​ ​the​ ​announcement​ ​today​ ​regarding​ ​the​ ​passive​ ​income​ ​threshold​ ​of​ ​$50,000​ ​-​ ​the​ ​most​ ​specific change​ ​we’ve​ ​heard​ ​-​ ​but​ ​still,​ ​questions​ ​linger.​ ​If​ ​the​ ​government​ ​intended​ ​to​ ​affect​ ​the​ ​top​ ​3%​ ​of corporations​ ​with​ ​passive​ ​income,​ ​how​ ​did​ ​they​ ​produce​ ​policy​ ​that​ ​would​ ​have​ ​affected​ ​100%?​ ​How can​ ​small​ ​business​ ​have​ ​faith​ ​in​ ​any​ ​of​ ​the​ ​government’s​ ​proposals​ ​given​ ​how​ ​badly​ ​it​ ​was​ ​botched​ ​the first​ ​attempt?​ ​Will​ ​$50K​ ​threshold​ ​be​ ​indexed​ ​to​ ​inflation?​ ​What​ ​happens​ ​if​ ​interest​ ​rates​ ​jump​ ​-​ ​will​ ​the threshold​ ​be​ ​adjusted?​ ​What​ ​is​ ​the​ ​higher​ ​tax​ ​rate​ ​on​ ​the​ ​income​ ​over​ ​$50K​ ​-​ ​is​ ​it​ ​the​ ​73%​ ​rate​ ​they originally​ ​proposed?

The​ ​announcement​ ​on​ ​Monday​ ​regarding​ ​income​ ​splitting​ ​is​ ​another​ ​good​ ​example.​ ​The​ ​promise​ ​to provide​ ​​clearer​ ​rules​ ​are​ ​on​ ​its​ ​face​ ​a​ ​logical​ ​proposal,​ ​but​ ​why​ ​was​ ​no​ ​detail​ ​provided?​ ​Are​ ​small businesses​ ​now​ ​being​ ​asked​ ​to​ ​‘just​ ​trust​ ​us?’​ ​Whatever​ ​the​ ​final​ ​proposal,​ ​we​ ​continue​ ​to​ ​be​ ​very concerned​ ​about​ ​any​ ​‘reasonableness​ ​test’​ ​and​ ​asking​ ​employees​ ​of​ ​the​ ​Canada​ ​Revenue​ ​Agency​ ​to make​ ​judgment​ ​calls.​ ​What’s​ ​reasonable​ ​in​ ​any​ ​specific​ ​situation​ ​will​ ​depend​ ​on​ ​many​ ​unique circumstances​ ​-​ ​it​ ​is​ ​not​ ​fair​ ​of​ ​the​ ​government​ ​to​ ​ask​ ​bureaucrats​ ​to​ ​administer​ ​a​ ​reasonableness​ ​test, and​ ​it​ ​is​ ​not​ ​fair​ ​for​ ​business​ ​owners​ ​to​ ​have​ ​to​ ​submit​ ​to​ ​one. 

The​ ​other​ ​big​ ​news​ ​of​ ​the​ ​week​ ​was​ ​the​ ​announcement​ ​that​ ​the​ ​government​ ​intends​ ​to​ ​cut​ ​the​ ​small business​ ​tax​ ​by​ ​0.5%​ ​in​ ​2018​ ​and​ ​1.0%​ ​in​ ​2019.​ ​We​ ​are​ ​pleased​ ​that​ ​they​ ​reversed​ ​course​ ​and​ ​decided​ ​to keep​ ​that​ ​campaign​ ​promise​ ​-​ ​but​ ​this​ ​doesn’t​ ​solve​ ​any​ ​of​ ​the​ ​issues​ ​with​ ​the​ ​proposals​ ​on​ ​the​ ​table now.​ ​Not​ ​the​ ​least​ ​of​ ​which​ ​is​ ​the​ ​fact​ ​that​ ​the​ ​rate​ ​is​ ​applied​ ​to​ ​profits​ ​(and​ ​the​ ​government​ ​sometimes seems​ ​to​ ​take​ ​issue​ ​with​ ​small​ ​businesses​ ​having​ ​those).​ ​In​ ​the​ ​example​ ​used​ ​by​ ​the​ ​government’s backgrounder,​ ​“Victoria”​ ​runs​ ​are​ ​​very ​successful​ ​business​ ​with​ ​a​ ​$180,000​ ​profit.​ ​A​ ​1.5%​ ​reduction​ ​in the​ ​small​ ​business​ ​tax​ ​rate​ ​will​ ​give​ ​her​ ​a​ ​savings​ ​of​ ​$2700.​ ​Nice,​ ​right?​ ​But​ ​how​ ​much​ ​will​ ​other​ ​changes cost​ ​her?​ ​We​ ​have​ ​absolutely​ ​no​ ​idea​ ​because​ ​(a)​ ​we​ ​don’t​ ​have​ ​those​ ​details;​ ​and​ ​(b)​ ​it​ ​will​ ​still​ ​depend on​ ​circumstances.

Let’s​ ​not​ ​forget​ ​about​ ​the​ ​cost​ ​of​ ​compliance​ ​and​ ​red​ ​tape​ ​of​ ​these​ ​changes​ ​as​ ​well.​ ​​ ​Changes​ ​of​ ​this magnitude​ ​are​ ​impactful​ ​on​ ​businesses​ ​as​ ​they​ ​move​ ​forward​ ​doing​ ​business​ ​in​ ​this​ ​new​ ​tax environment​ ​not​ ​just​ ​in​ ​how​ ​they​ ​plan​ ​their​ ​business…​ ​but​ ​simply​ ​in​ ​complying​ ​to​ ​new​ ​rules​ ​and regulations.​ ​​ ​We​ ​need​ ​to​ ​make​ ​it​ ​easier​ ​to​ ​do​ ​business,​ ​not​ ​more​ ​difficult​ ​and​ ​costly.​ ​​ ​During​ ​Small Business​ ​Week​ ​in​ ​Canada​ ​-​ ​let’s​ ​have​ ​our​ ​focus​ ​on​ ​how​ ​to​ ​improve​ ​the​ ​situation​ ​where​ ​small-​ ​and medium-sized​ ​businesses​ ​can​ ​grow​ ​and​ ​continue​ ​to​ ​employ​ ​more​ ​than​ ​90%​ ​of​ ​the​ ​private-sector workforce.

All​ ​of​ ​this​ ​underscores​ ​the​ ​need​ ​for​ ​the​ ​Canadian​ ​Chamber​ ​of​ ​Commerce​ ​networks’​ ​call​ ​for​ ​a​ ​Royal Commissions​ ​to​ ​do​ ​a​ ​legitimate,​ ​comprehensive​ ​review​ ​of​ ​the​ ​country’s​ ​tax​ ​system​ ​has​ ​never​ ​been greater.​ ​Rather​ ​than​ ​continually​ ​making​ ​the​ ​tax​ ​code​ ​more​ ​complicated​ ​with​ ​bandaids​ ​and​ ​politically motivated​ ​measures,​ ​is​ ​it​ ​not​ ​time​ ​to​ ​step​ ​back​ ​and​ ​have​ ​a​ ​serious​ ​conversation​ ​about​ ​tax​ ​in​ ​Canada? We​ ​need​ ​a​ ​Royal​ ​Commission​ ​because​ ​it​ ​is​ ​(a)​ ​at​ ​arm's​ ​length​ ​from​ ​governments​ ​and​ ​(b)​ ​extends​ ​beyond the​ ​life​ ​of​ ​any​ ​particular​ ​government​ ​-​ ​​unlike​ ​other​ ​vehicles,​ ​once​ ​a​ ​Commission​ ​has​ ​started,​ ​the government​ ​cannot​ ​stop​ ​it.

Most​ ​importantly,​ ​a​ ​Royal​ ​Commission​ ​removes​ ​politics​ ​from​ ​the​ ​equation.​ ​Tax​ ​changes​ ​are​ ​often​ ​used for​ ​political​ ​purposes,​ ​and​ ​certainly​ ​in​ ​this​ ​case​ ​have​ ​been​ ​-​ ​at​ ​a​ ​minimum​ ​-​ ​divisive​ ​and​ ​contentious. Business​ ​wants​ ​to​ ​take​ ​politics​ ​out​ ​of​ ​this​ ​process​ ​-​ ​does​ ​Minister​ ​Morneau?

Krista Ross is CEO of the Fredericton Chamber of Commerce. With more than 950 members, the Fredericton Chamber of Commerce is one of Atlantic Canada’s largest chambers of commerce. A dynamic business organization, the Fredericton Chamber of Commerce is actively engaged in policy development that affects the competitiveness of our members and of the Canadian business environment. It’s vision is "Community Prosperity Through Business".