Will Liberals fold again on difficult tax reform?

Pity Bill Morneau. The federal finance minister who caved in on his plan to end a big tax break is now taking aim at something far more modest.

Yet even that has ignited a political firestorm that’s unnerved the governing Liberals and given the feckless opposition Conservatives something substantive to attack.

The big tax break that Morneau caved in on was a loophole favouring those paid in the form of employee stock options. That one, which costs the federal treasury about $840 million a year, was singled out by the Liberals during the 2015 election campaign as a break they would end.

But after winning power, the Liberals changed their minds. They said stock options were great, that they encouraged the millionaire CEOs and others who typically receive them to be innovative.

Instead, Morneau began to fix his baleful gaze on something called the Canadian-controlled private corporation.

It’s a form of corporate organization used extensively, but not exclusively, by small business. More to the point, it gives the owners significant tax advantages that most Canadians don’t enjoy.

Independent research by tax experts such as the University of Ottawa’s Michael Wolfson show that the use of these private corporations has skyrocketed in recent years.

In one study published by the Canadian Tax Journal, Wolfson and others calculated that the tax advantages associated with private corporations disproportionally favour the top 1 per cent of income earners.

In other words, this isn’t just a tax break used by mom-and-pop convenience stores.

Among other things, it allows well-heeled professionals to split their incomes among family members in order to minimize taxes.

The estimated cost to the treasury of the so-called tax expenditures associated with private corporations is relatively modest – roughly $250 million a year. But politically, closing these particular loopholes seemed a winner for the Liberals.

It fit Prime Minister Justin Trudeau’s promise to rejig the tax system in favour of what he called the middle class.

More importantly, it seemed – at first – to face little opposition. The Liberals’ 2015 election platform took explicit aim at private corporations. But at the time, few seemed to care much.

Nor was there mass outrage when Morneau pledged in 2016 to take a hard look at tax expenditures generally.

All of that changed in July when the finance minister released his formal plans for dealing with private corporations.

That’s when the controversy exploded.

Canadians take their tax breaks seriously. They grouse if general tax rates go up. But, as the Liberals should remember from history, they can be apoplectic when their specific loopholes are threatened.

Two of Pierre Trudeau’s finance ministers, Edgar Benson and Allan MacEachen, lost their jobs for attempting serious tax reform. The politics were just too difficult.

So it is today. Small-business lobbies such as the Canadian Federation of Independent Business have reacted furiously to Morneau’s proposal. Farmers are nervous. Liberal MPs are being bearded in their ridings.

The Canadian Medical Association, many of whose physician members have formed private corporations specifically to take advantage of the tax loopholes Morneau wants to close, have levelled volleys at his scheme.

In an attempt to appeal to the prime minister’s avowed feminism, the CMA has even played the gender card, noting that the tax breaks the government wants to end allow female physicians to fund maternity leave benefits they would not otherwise enjoy.

In fact, like all other self-employed individuals, physicians who choose to pay employment insurance premiums are eligible to receive up to 50 weeks of maternity and parental benefits from the government.

But such facts are largely irrelevant in what is already a vigorous propaganda battle.

Will the Liberals fold again? Trudeau says no. He says the government will do something to correct this particular tax inequity.

How much it will do remains the great unknown.

Thomas Walkom is a national affairs writer.

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