Dear Fellow Canadians,

As a tax professional and business advisor, I’ve abstained from making public comments on the proposed tax changes by the Minister of Finance.

Then I read Bill Morneau’s opinion article contributed to the Globe and Mail (http://ow.ly/K9I030eY7Qd). It made my eyes bleed bile.

As a Canadian taxpayer with a young family, I could not lay down as the Feds attempt to pull the wool over our eyes with rhetoric. That’s why I’ve decided to #factcheckbill

I know first-hand that running a business is hard work. It involves taking risks, suffering setbacks and often a great deal of sacrifice.

… and now with my government salary, pension, benefits and a personal net worth in the tens of millions, I personally no longer have to worry about those risks…

In the first sentence, Finance Minister Bill Morneau (henceforth FMBM) admits there are risks to running a business. We’ve got a lot of ground to cover here, but keep repeating this mantra as you read through:

Not all business owners are wealthy. #factcheckbill

When you think of business owners, don’t think of the fat cats on Bay Street. Think of your neighbourhood convenience store, your favourite restaurant, your family dentist and doctor, your local hardware store or fish and tackle shop. For whatever hobbies you have or wherever you spend your money – behind each business there is likely an owner supporting their family.

Last time I checked, Tony from my local burger joint (best burger in Vancouver, btw) is not considered to be one of Canada’s wealthy elite. He’s owned his business for 8 years, at which he works six days a week for 10 hours a day, sometimes longer. He’s worked hard to help put his common-law partner through nursing school, whom also works at their spot. If Tony gets sick, he needs to have someone cover his shifts. God forbid it’s a long-term illness, Tony would have to close his doors.

The proposed tax reforms add undue risks, setbacks and sacrifices for business owners like Tony and tens of thousands of Canadian families across the country.

The good news is businesses are doing just that. In the past year, we have seen the fastest real GDP growth in more than a decade. Second quarter results at 4.5-per-cent growth and more than 350,000 new full-time jobs created over the past year mean our economy is growing faster than any Group of Seven country.

If businesses are doing well and the Canadian economy is out-performing every other G7 country, why implement a tax reform that would disincentivize business owners and impede growth?

Our current tax system is designed to fuel the accelerated growth of businesses, which boosts employment and benefits all Canadians . Our growth in GDP is a measurement of this feat.

But economic growth alone is not good enough.

He’s right, it isn’t. We are only as good as our countrymen whom are the worst-off.

That is why, as its first order of business, our government introduced a middle-class tax cut that is benefiting nearly nine million Canadians – and, yes, to finance it, we raised taxes on the top 1 per cent.

Sounds great, tax the rich! Seems like a logical stopping point.

But the job is not done.

Over the past 15 years, we have seen big changes in our economy. The number of Canadian-controlled private corporations (CCPCs) has increased by 50 per cent and makes up a much bigger part of our economy than they did in the early 2000s. For professionals, the number of corporations has tripled over that same period.

It sounds like we may have too many businesses in this country. What sort of effect has this had on tax revenues?

Figures taken from Department of Finance Canada annual reports: https://www.fin.gc.ca/pub/annual-annuelle/archives-eng.asp

The mention of the increase in CCPCs is a red herring. What isn’t mentioned is that personal tax revenues have increased by $65.5 billion (82.5%) and corporate tax has increased by $18.3 billion (78.9%) from 2000 to 2016.

While the number of CCPCs may have increased by 50%, total income tax revenues over the past 15 years has exceeded this increase. Total tax revenues from 2000 to 2016 increased 81.7% ($83.8 billion). This doesn’t even factor in the increase in non-resident, excise and sales taxes, which is somewhere in the range of $10+ billion.

The number of incorporated businesses is positively correlated with tax revenues generated and our economic growth. The fact that the number of CCPCs has increased over the past 15 years is a moot point.

While we know most businesses are investing and creating jobs…

Fantastic!

…we also know that corporate structures are being used to reduce personal taxes. That leaves us with a challenge that is unsustainable.

Unsustainable? But what about our fancy table from above? Here’s a revised one that looks at the trend in personal tax revenues generated from 2000 to 2016.

Save for the outlier years in 2003 and 2010, personal tax revenues have consistently increased each year. How is this trend in personal tax revenues an ‘unsustainable challenge’?

Answer: our spending.

While personal and corporate tax revenues increased $11.15 billion in 2016 alone ($9.16 and $1.99 billion respectively), spending also increased $11.78 billion. Of this increased spending, $8.07 billion (68.51%) related to program spending for crown corporations, national defense and other departments and agencies.

FYI, 2016 spending increase as follows: $768 million increase to crown corporations, $4.85 billion to national defense, $2.45 billion to other departments https://www.fin.gc.ca/afr-rfa/2016/report-rapport-eng.asp#_Toc46324947

It doesn’t seem that Canada has an issue with generating tax revenues, let alone personal tax reduction issues. It seems that it may have a spending issue.

So what?

Rather than debating the merits of how tax dollars are spent and instead of implementing a tax reform that has the potential to melt our economy, there are other options available:

- Increasing consumption and excise taxes on certain items and luxury goods;

- closing actual tax ‘loopholes’ for individuals and corporations alike;

- stronger enforcement of tax laws and increasing punitive damages for gross negligence offenses;

- adjusting non-resident tax rates and policy;

- creation of additional high income tax brackets and an increase in personal tax rates for high income earners (sorry clients – I know this one might not be popular with you)

I’ve spent too much time on this point, so here’s the tl;dr

Our BUDGET is unsustainable , not our tax revenues.

The Department of Finance is an impetuous teen that spent too much on its credit card and needs Canadian taxpayers to bail it out.

As more and more people set up corporations, there is a growing number of individuals who have access to tax advantages not available to other hard-working Canadians.

I don’t know if it was purposeful, but there is a notion of pitting

“individuals who have access to tax advantages”

versus (other)

“hard-working Canadians”

My stomach churned tears.

When trying to build rapport and gain approval from a person or group, the easiest thing to do is single out a minority person or group. In this case, the minority group is 50,000 Canadian families whose tax reform this would affect.

FMBM’s statement above is the moral equivalency of ‘yeah! Eff those guys!’

Advantages versus the risks

It’s true: Canadian business owners absolutely have access to tax advantages that are not available to other Canadians. But they also bear significant risk:

- Business owners can’t contribute nor access Employment Insurance;

- Business owners must fund their own pensions (in some cases, their business IS their pension);

- Business owners do not have unions;

- Business owners have to pay their own extended health and medical fees;

- If a business owner falls ill and is unable to work, there is a risk that their business could fold;

- Working hours are almost never 9 to 5, and vacations/time off almost always comes at a price;

Business owners also lose sleep

They worry about debt, making payroll, securing contracts, keeping the lights on. They invest their blood, sweat and tears into their businesses. They sacrifice time with family and friends to make things work. Under the shroud of “tax fairness”, this crusade will make things harder and disincentivize current and prospective business owners. Influencing individuals to be indifferent between being an employee or an employer is not the right direction for our economy or Canadians.

There are only so many public-sector jobs available to Canadians (and apparently only one Finance Minister position, though I’m waiting for my offer letter!) The private sector spurs innovation and promotes a flourishing middle class – Canadians need it to thrive.

Yes, business owners have access to tax advantages, but we need them to be willing to step up and take risks.

Let’s compare

To put things into perspective for the majority of Canadians, whom aren’t business owners, let’s flip the table.

Canadians hold over $1 trillion of assets in their RRSPs. A 1% tax on these assets would boost tax revenues by $10 billion! Who’s with me?

Imagine if the proposed tax changes included in a tax on assets held in Canadian pensions. There would be blood in the streets.

Why you can’t flip the table on businesses

Personal and corporate tax integration and structure is something that has evolved through decades of tax legislation, policy and thousands of tax court cases. This tax reform would undo an unfathomable number of human hours, days, years, even lifetimes exhausted to arrive at our current tax system.

Imposing these tax changes would be flipping the table on a game of chess we’re already winning. The Canadian economy is flourishing and outperforming our G7 partners.

This means that some of the highest-income earners are effectively being taxed at a much lower rate than everyone else.

I know it’s been a while, but do you remember our mantra?

Not all business owners are wealthy.

Before we dive in, we need to establish whom FMBM is referring to as “some of the highest-income earners”. The best we can do is use the context provided. Further in the article it’s stated:

No wonder some estimate that two thirds of the wealthiest 0.01 per cent own a CCPC.

Oh Bill. No wonder indeed.

So, “some of the highest-income earners” means the wealthiest 0.01%.

Let’s establish who the top 0.01% are. Based on Statistics Canada data for 2015 (http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil105a-eng.htm), there were 240,280 individuals that earned $250,000 and over. This group of individuals represents 0.9% of the total 26,810,840 individuals that filed their tax returns. Making the assumption that the wealthiest 0.01% actually report income and pay their taxes (a discussion for another time), they are likely in this bracket. If earning $250,000 or more represents 0.08% Canadians, what does the 0.01% represent? $500,000 or more? $1,000,000 or more?

These tax proposals have NOT been developed to target the top 0.01%. They are targeting individuals at every income level. These are your family owned restaurants, retail store owners, fishermen, farmers; these are your neighbours.

If FMBM is intent on taxing the top 0.01%, great. Why not create a new tax bracket for individuals earning over $300,000, $500,000 and $1,000,000 a year? As FMBM stated, raising taxes on the top 1% was a success in 2016 – so why wouldn’t it work for taxing the top 0.01% in 2017?

The average income in Canada is estimated to be about $49,000 this year. An incorporated professional earning $300,000 with a spouse and two adult children can save about $48,000 in taxes by using just one of these loopholes.

I can’t vet these figures, because it’s not clear what “loopholes” are being referred to.

A similar argument can be made for an incorporated professional earning $300,000 with two parents, three brothers, four sisters, a spouse, two adult children, two cats and a dog can save $150,000 in taxes – this doesn’t mean the anecdote is relevant.

The Department of Finance exists to develop policy and implement tax laws. The Canada Revenue Agency exists to enforce them. If there are “loopholes”, then use the CRA to address them.

Quick direct and non-so-private message to FMBM: I challenge you to try running a business, being the sole income-earner for a young family, whilst renting a home in Vancouver or Toronto – without the financial help from family.

“loopholes”

The very use of this word is dismissive to thousands of hard working (see what I did there?) Canadian families and businesses.

Rather than identifying specific tax provisions or proposed changes, a negative connotated word is used. Referring to major tax reform as “closing loopholes” is dangerous propaganda for Canadian taxpayers.

As mentioned above, our current tax system is something that has evolved over decades of informed research, due care in the development of policy and case law. It’s usually best to pick the lowest hanging fruit, rather than cutting off an entire branch of the tree.

Rather than shaking down our small Canadian business owners, let’s identify some actual loopholes:

- Offshore tax shelters and planning (I don’t think Tony has one of these, we’re OK)

- Aggressive multi-national transfer-pricing tax schemes

- (Continued) crack-down on abuses to tax provisions like the principal-residence exemption

- Implementing a tax on wealth held, rather than imposing on families trying to make a living

The last point above is key. If FMBM is concerned with taxing the wealthy – then tax the wealthy. It is extremely easy to write a few words and feign empathy for the risks, setbacks and sacrifices that Canadian business owners take, especially when you "know first-hand" about it.

Here’s the sticking point – Bill Morneau is one of Canada’s wealthy elite.

as a former business owner and high-income earner myself, I do not think it is right.

While you may not think it is right, Canadians want to know if their Finance Minister has benefited from tax advantages in the past. If so, would he be willing to pay these benefits back?

Diving further into this, if taxing the wealthy is a priority, then implement a wealth tax. Surely any Canadians that hold $100+ million in assets wouldn’t notice half a per cent of their wealth missing, given the average growth rate of investments in Canada.

What that means is an incorporated professional could be taxed at a lower rate than a salaried nurse practitioner or police officer making much less a year.

Déjà vu.

The easiest way to build rapport and gain approval is to pit one group against a minority group. For the nurses and police officers out there, this statement is condescending and FMBM thinks you are ignorant.

Not all business owners are wealthy.

Business growth encourages innovation and creates jobs, employment incomes generate tax revenue, tax revenues pay for essential services that all Canadians benefit from. If these tax reforms are imposed, growth may be impeded, employment rates may drop and there would be less funding available for government spending across the board.

As part of this effort, I am visiting small business owners and professionals across the country, looking to hear their ideas, concerns and to answer their questions.

There are thousands of tax accountants, tax lawyers, economists and business owners conveying their genuine concerns on these proposals. We can only hope that they are considered and taken seriously.

There was more of FMBM’s article, but I’m now too mentally and emotionally drained to address it. So I’ll try to leave things on a high note:

business will continue to take advantage of the lowest small-business rate in the G7… more than 12 points lower than the United States.

Please don’t use our neighbours to the South as a benchmark. Besides, as noted by you, doesn’t Canada have the fastest growing economy in the G7?

Basic economic theory tells us that taxes are designed to influence the behavior of tax payers.

- Don’t want people to smoke? Tax cigarettes.

- Want to reduce CO2 emissions? Tax fuel consumption.

- __________________________ ? Tax thousands of hard-working Canadian families.

Fill in the blank.