Opinion: At least Bill Morneau attempted tax reform

Bill Morneau may not be the world’s most adept politician. But as federal finance minister, his truncated tax reforms are at least still going – barely – in the right direction.

Let’s hope that he and Prime Minister Justin Trudeau don’t back off from them entirely.

They did continue their backtracking Thursday. Morneau announced he won’t proceed with plans that would have limited the ability of Canadian-controlled private corporations to reduce their taxes by treating income as capital gains.

He said he was doing this at the behest of farmers, who had complained that his original scheme would have made it more costly to transfer operations to their children.

But the backaway applies to owners of all private corporations, not just farmers.

Canadian-controlled private corporations are companies whose tightly held shares are not traded publicly. Most, but not all, are small businesses. Many are family-owned.

When Morneau took aim at them this summer, his stated goal was to curtail abuse by relatively well-to-do Canadians who were gaming the system just to avoid taxes. But he inadvertently raised the ire of politically important groups, such as small-business owners, farmers and physicians.

His critics were even able to portray his reforms as anti-women, an unforgivable crime in Trudeau’s gender-sensitive government.

As a result, Morneau has spent most of what the Liberals call small-business week shamelessly backpedaling.

On Monday, he announced he would “simplify” a proposal that would have limited the ability of private-corporation owners to reduce their taxes by splitting income among family members – whether or not they contribute to the business.

On Thursday, he capitulated on the capital gains question.

But on Wednesday, he kept an important reform alive.

That’s a proposal to close a loophole that allows owners of private corporations to avoid taxes on investment income earned from activities that have nothing to do with their business.

In his original plan, Morneau had proposed taxing this so-called passive investment income across the board.

But after the usual suspects complained, he came up with a more politically adroit version that would affect only the truly affluent.

Under the revised scheme, private-corporation owners would be able to shelter up to $50,000 a year in passive investment income from full taxation. But any such income above that threshold would lose this advantage.

The government reckons this would affect only 3 per cent of Canadian-controlled private corporations.

It also reckons that just 29,000 firms, or just two per cent of private corporations, hold passive investment assets worth between $200 billion and $300 billion.

These 29,000 firms earn an estimated $16 billion each year on their passive assets, income that they are able to shelter from the full tax rates that individual Canadians who do not incorporate themselves must pay.

Under Morneau’s revised scheme, private corporations would still be able to shelter this existing $16 billion. But they wouldn’t be able to add to it.

Which, for those interested in tax reform, is better than nothing.

While politically risky, Morneau’s attempt to take on private corporations is eminently reasonable.

The original aim of incorporation was to promote investment in risky but worthwhile ventures by limiting an investor’s liability. If an incorporated company went bankrupt, for instance, stock holders might lose the value of their shares. But they wouldn’t lose their homes.

Today, however, incorporation is too often just a tax dodge. A doctor or consultant or freelance journalist incorporates not to limit liability but to take advantage of the small-business tax rate.

The government encourages this perversion of incorporation every time it announces plans to lower the small-business tax rate (as Morneau did this week).

So it is encouraging to see any finance minister attempt to do anything about this problem. Let’s give half a cheer for Bill Morneau’s attempt at tax reform. At least he tried.

Thomas Walkom is a national affairs writer.

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