The most feathers for the least amount of squawking*

September 15, 2015

When I retired from a career in education I knew very little about taxes: the provincial and federal governments helped themselves to my salary, followed by the pension plans. Whatever remained, most years about 54%, went toward the costs of running a family.
The only part which really offended me was the paltry tax deduction for a kid at university. For all Jean Chretien’s rhetoric about helping Canadian students through post-secondary schooling, the only fund available was the personal line of credit at the local bank.

The largest tax deduction I managed in a year during our son’s university career was 16% of $1500, or $240.

Thus imagine my surprise when, in the reaction to Justin Trudeau’s comment about small business tax rates in the Peter Mansbridge interview, journalists postulated that a doctor or a lawyer who is incorporated can easily pass along a tax-free $40,000 dividend to a family member at university!

I googled small business taxes in Canada and quickly ran across the work of Dr. Jack Mintz at the University of Calgary and Dr. Michael Wolfson at Ottawa U.

Mintz doesn’t seem to agree with Harper’s fervent declarations that the small businessman is the life and soul of the Canadian economy. He points out in various articles that while small businesses create many jobs, they also destroy almost as many when the businesses close.

According to Mintz, small business jobs are inherently precarious, and usually without benefits or pension plans. He suggests that the net employment of larger corporations is of vastly more importance to the Canadian economy.

He suggests as well that a low small business tax rate may well keep businesses from growing to avoid higher corporate tax rates.

I found in a May 25, 2015 Globe and Mail article by Janet McFarland an interview with Dr. Michael Wolfson of the University of Ottawa. Wolfson commented that most people don’t realize income splitting has long existed for thousands of professionals such as doctors and lawyers who have been able to funnel their incomes through private companies (small businesses) they create to hold their income.

“Over in this dark corner of the tax system that most people don’t know exists and most people don’t understand how it works, income splitting has been going on for decades,” Prof. Wolfson said in an interview. “But nobody shines a light on it, nobody asks what’s going on here.

“A mid-range estimate of the cost is about $500-million based on 2011 tax data. Here we have quite a substantial reduction – for round figures, I’d say in the half billion dollar range – and a bunch of money going out that Parliament never looks at it, and it never gets evaluated,” he said.

A majority of private companies – known as Canadian-controlled private corporations (CCPCs) – are created by people in top income brackets to hold a private business. CCPCs can be created by owners of stores, restaurants, farms or other typical small businesses, but they can also be used by doctors, lawyers and some other professionals as a way to incorporate their business activities.

Even when salaries and dividend payments are legitimate, Prof. Wolfson said his research suggests the costs to the tax system have never been calculated and the impact should be understood and analyzed.

He said both the Conservatives and NDP are proposing to lower the tax for small-business owners in the future, but said they should understand that this would benefit many well-paid professionals who use small private companies to incorporate their operations, which may not be the intent of their tax proposals (Globe and Mail, 2015).

Stephen Harper and Charlie Angus have both attacked Justin Trudeau in the last week for his comment on examining small business tax rates before lowering them, Harper saying that he is calling the owners of small businesses “tax cheats.”

While I was the class dunce in Economics 110 at Queen’s in 1969, it certainly seems to me that if the evidence shows that a tax reduction to a certain sector of the economy does more harm than good, a sensible leader takes that fact into account in preparing a budget.

Fellow English major Justin Trudeau has much better economic advisors than I have had, and he apparently listens to them. His team approach seems to be at the heart of a Liberal platform which is becoming increasingly realistic and responsible.

*Professor Brian Sharples taught me The Economic Context of Education in the Queen’s M.Ed. Program. Sharples maintained that this is the only valid principle of taxation:

That tax is best which gets the most feathers for the least amount of squawking.

UPDATE: 15 September, 2015

I guess I’m not the only one with this idea: http://www.nationalnewswatch.com/2015/09/15/tax-expert-says-canada-needs-to-change-corporate-tax-system-to-prod-investment/#.Vfi932RVikp

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