By: Michael Warner, MD, FRCPC, MBA
President, AdvisoryMD
As the 75-day consultation period on Tax Planning Using Private Corporations comes to a close on October 2, small business owners continue to share their feedback about the proposed changes. As an incorporated physician and entrepreneur, I am discouraged by the divisive strategy used by the government to communicate the proposals, concerned about the implications for existing labour agreements and disappointed by the lack of analysis of the economic impact of the changes.
From the outset, the government has relied on inflammatory rhetoric to fan the flames of outrage in the general public about the way small businesses are taxed. Physicians, in particular, have been targeted for exploiting tax “loopholes” implying that those who use legal tax planning strategies are being dishonest. Missing from the government’s message is that in Ontario, physicians negotiated for the right to incorporate in 2000 in lieu of fee increases or being granted employee benefits. Physicians were subsequently encouraged by the government to incorporate as part of their tax planning and retirement savings strategies.
The concept of “good faith” is fundamental to all labour negotiations in Canada. Unfortunately, the actions by the federal government call into question their belief in this principle. The proposed tax changes will eliminate nearly all the financial benefits of incorporation for physicians. The rules by which incorporated physicians have planned their business and financial future will be changed unilaterally and outside the process of re-negotiation. This will functionally sever the covenant made between Ontario's physicians and the provincial government. If these proposals become legislation, the sanctity and durability of all labour agreements made with provincial and/or municipal governments, will be undermined.
For many Canadians, funding a robust social safety net through taxation is part of having a fair and just society. As evidence of this, some of my colleagues have advocated in an open letter that adequate tax revenues are required to fund social programs such as affordable housing, pharmacare, social assistance, legal aid and the healthcare system itself. While these are important programs, it is incorrect to assume that increased federal tax revenues extracted from physicians and other small business owners will be directed to fund this list of largely provincial and municipal programs.
The message from the government has been consistent. Rather than supporting Canada’s poorest citizens, these tax changes will improve the lives of the middle class. Unfortunately, the 63-page consultation document is devoid of any discussion or analysis of the expected economic impact of the proposed tax changes. In the absence of substance, a leap of faith is required to conclude that these tax changes will help anyone.
What is undeniable is that the proposed tax changes will increase the overall tax burden on small businesses. These small businesses are the economic engine of Canada. In June 2016, the Small Business Branch of Innovation, Science and Economic Development Canada published its Key Small Business Statistics report. As of 2015, small businesses employed over 8.2 million Canadians, or 70.5% of the total private labour force. Furthermore, small businesses accounted for 87.7% of the net employment growth between 2005 and 2015 (1.2 million jobs).
The government has sought to assuage the concerns of small businesses about these changes by indicating this proposal only impacts the "wealthy". However, there has been no in-depth analysis of the range of consequences to the individual taxpayer and the ripple effect on the Canadian economy. These could range from minor to major, from startups being starved of capital to middle class employees losing their jobs as owners trim expenses. Philanthropic donations may also diminish as businesses reduce their support for worthy causes. The fact is we do not know what will happen because this policy has not been subject to thoughtful evidence-based evaluation.
It is surprising that any group can support these tax changes as currently written. At a recent constituent town hall meeting, my own MP admitted that he did not fully understand them. Even accountants find the complex algebraic equations in the consultation document, impenetrable. The goal of any change to the taxation system should be to simplify it. Unfortunately, this tax proposal makes the tax code more challenging for entrepreneurs to navigate and more expensive for them to comply with.
Two generations ago, The Carter Commission was given four years to develop a new tax framework for Canada and the then-Liberal government took another five years to finalize reasonable legislation. Rather than relying on political rhetoric to drum up support for this flawed plan, I urge the government to conduct a more rigorous evaluation of the taxation system. Extend the consultation period and integrate input from a broad range of stakeholders, including small business owners, accountants, lawyers, academics, employees and tax payers. Tax fairness will not be achieved through divisive politicking and incomplete analysis.
Michael Warner is the President of AdvisoryMD and provides personal finance education, billing training and career counselling to physicians.
