The Top 6 2017 Canadian Liberal Government Messes (Mostly Tax Related) to be Concerned About and Take Action

Prior to 2015, I was never that politically “interested”. That’s not to say that I wasn’t educated about our democracy – I studied Canadian history and political science as part of my undergraduate degree and was, and still am, keenly interested in such subjects. I also understand that politics – in a direct and many cases indirect fashion – impact most aspects of our day to day lives. However, I think it’s fair to say that since 1984, our federal governments have been business friendly and ultimately they understood that a strong business community is good for the country as a whole. Accordingly, I was satisfied that our democracy was “working”. In 2015, that changed dramatically. It started in my home province of Alberta when a new socialist government was surprisingly elected. Months later, a new kind of Liberal federal government was elected that was distinctively left of centre. With rallying cries of “tax the rich” the new Alberta and federal government started to quickly implement their agenda that was not at all friendly to the business community. This got me quickly interested. Much of what Canada has achieved is credited to its “can do” attitude combined with a spirit of entrepreneurialism. With that in mind, I’ve put together a countdown of my “Top 6” list of messes that our current federal government created in 2017 – and some earlier – that we need to consider and take action against in 2018. (I’ve resisted the urge – mostly – to comment on issues that I’m not qualified to comment on – such as foreign policy, ethics breaches, budget deficits, apologies, etc.).

6. Failed Speaking Points – QR77 Radio host Rob Breakenridge put together a fine summary of failed speaking points by our illustrious PM and it can be heard here. While I never begrudge anyone for not being able to publicly speak – public speaking is very difficult and requires one to think quickly on their feet – the fact that our PM deals with day-to-day issues through canned talking points is troublesome. The Globe and Mail put it succinctly in a recent piece: our PM is disengaged and views the role of PM as “ceremonial”. Anyone who understands our democracy should be concerned. The PM position is more than just a ceremonial position. Such a position requires true leadership for the benefit of all Canadians. For anyone who wants a quick reminder on what leadership entails, Wikipedia has a nice summary here. The bottom line: Canada needs authentic and engaged leaders not talking heads.

5. The Disastrous July 18, 2017 Tax Proposals – I’ve written about this disaster many times via our firm’s blogs. I have been very critical of the class-warfare inciting rhetoric that accompanied the proposals and the related defense. Frankly, the whole process of how these proposals were released was a fine example of how not to implement tax policy changes. Transparent, open and honest engagement from all stakeholders – not just government bureaucrats, politicians and certain academics – is needed. The fight regarding these proposals is not over. Far from it. The passive investment proposals (to be released in the 2018 Federal Budget) and V2 of the income splitting rules (which we wrote about here) is shaping up to be very troublesome for Canadian entrepreneurs. Unless our federal government “leaders” wake up to the harm that these proposals will cause, expect many private businesses to be negatively affected with successful businesses continuing to deploy their capital outside of Canada. More on that below.

However, one positive aspect that arose from the disastrous rollout was that the need for comprehensive tax reform in Canada was highlighted. The tax community has been calling for comprehensive tax study and reform for well over 10 years. While doubtful that we will see anything soon, the fact that the average Canadian and media seem to be joining the tax community in the call for reform and study is encouraging. Andrew Coyne wrote an interesting article on this topic recently and it is worth a read.

4. The “Middle Class” Talking Points – How many times in the last 2 years have you seen the following quote (or slight variations):

When you have an economy that works for the middle class, you have a country that works for everyone. The Government is committed to building a strong economy and a fairer and more efficient tax system that benefits all Canadians. That is why as one of its first actions, the Government raised taxes on the wealthiest one per cent in order to cut taxes for the middle class. As well, the Government’s first budget replaced the previous child benefit system with the Canada Child Benefit, which is simpler, more generous, and better-targeted to those who need it most.

First off, can someone please provide an exact definition of “middle class”? The simple fact is that there isn’t one. Accordingly, such a phrase is meaningless - obviously intended to attract votes - and is not grounded in any policy study. The above quote – revised to be suitable in the circumstance – was also used to rollout the July 18, 2017 tax proposals. Accordingly, a prominent tax practitioner requested an Access to Information Act request to see if the government had in fact studied the impact that the proposals would have on the “middle class”. You’ll find the response here. Short answer – no study had been done.

The sorrows of the “middle class” were eloquently written about in this article describing the July 18, 2017 tax proposals that has the following quote:

“Rather, there is a hollowness at the heart of this government, a fundamental falseness, which the episode has exposed. The ritual, almost obsessive-compulsive invocations of the sorrows of the middle class were always made up, as made-up as the party’s pose as soak-the-rich populists, and with the same objective: to inoculate Trudeau, and latterly Morneau, against the charge of being entitled trust-fund millionaires, with no concept of the struggles of ordinary folk. Look at us, they seem to say, attacking our own!”

I think the above quote summarizes the hollowness of the “middle class” speaking point nicely.

Second, does anyone else find it offensive that the government continually trumpets the fact they increased the personal tax rate on the “wealthiest”? It’s obvious such trumpeting is intended to appeal to a certain class of voter but – again - the class warfare tactic is offensive. The bigger issue, however, is that the “wealthy” have many options to reduce their exposure to offensive tax rates and believe me they are deploying such tools (as this article about New Brunswick’s experience with increased personal tax rates describes). I’ve written about the damage of increased personal tax rates here. Canada needs to correct this soon. More on this below. 

Lastly, I challenge you to cruise through the Department of Finance website, numerous Liberal MP’s websites and their social media accounts. The number of times that the above quote – with variations – has been mindlessly “cut and paste” is astounding. Perhaps if you say it or hear it enough times then it becomes “true”. Canadians are smarter than that but ultimately many need to wake up and realize that when you have an economy that works for EVERYONE (not just the undefined “middle class”) then you have a country that works for EVERYONE. 

3. US Tax Reform and the Challenge to Canada’s Competitiveness

Late last month, the United States passed historical tax reform that will impact virtually every American. While you might have an opinion about whether such reform is good or bad, there is little doubt that such reform will impact Canada. As Dr. Jack Mintz recently wrote, Canada’s competitiveness is at risk. I’m a tax practitioner on the front lines of helping private businesses deploy their capital and I can confirm that Jack Mintz’s concerns are real. The amount of capital that our firm has helped deploy outside of Canada over the last 24 months is VERY significant. Much of the reasons for this can be summarized by the various policies – tax and non-tax – that have been implemented by our new governments. Increased personal tax rates has been a very significant contributor. Canada needs to wake up to this competitive risk quickly. Unlike some economists who suggest that Canada does not need to respond with tax changes and instead compete with other tools, I respectfully disagree. Canada needs to look at its entire tax landscape and respond accordingly. A reversal of the personal tax increases on the “wealthiest one per cent” would be a good start. But much more needs to happen.

2. Misleading “Facts”

Over the course of the disastrous July 18, 2017 rollout of the private corporation tax proposals, the talking points that were used by the Liberals to defend against criticisms were shocking in their shallowness and outright errors. When the tax community started to pushback against such misleading “facts”, one would expect the politicians to correct their errors. Instead, many politicians dismissed the corrections and accused the tax community of misleading the business community with “scare tactics”. This was one of my first experiences dealing with the down and dirty of politics – which I now understand can be a brutally ugly game. The dismissiveness of the facts was – and still is – shocking to me. I started to keep track of the misleading statements made by some of the politicians and rebutted such statements with corrections. I named this document “Myths vs. Facts” and it can be accessed here. Every time I read the document that I put together, it shocks me. Canada deserves better from its politicians. Yes, I recognize that is not a new sentiment but tax is a complex and critically important topic that demands attention to detail. Politicians should gladly accept input from the practitioner community in helping to develop good tax policy for ALL Canadians.

1. Gender Analysis of Tax Proposals – Stay-at-Home Mothers are Apparently Not Contributing to Canada

As most now know, V2 of the income splitting proposals was released by the government on December 13, 2017. The material released contained some commentary regarding the gender impacts of the proposed legislation. I wrote the following about the gender commentary in our firm’s blog:

Finally, as has been common with our existing government, a gender-based analysis commentary is included as part of the TOSI proposals:

"Data show that men represent over 70% of higher-income earners initiating income sprinkling strategies, and women represent about 68% of recipients of sprinkled dividends (and 58% of recipients of income derived from trust and partnerships). While this income is of benefit for recipients, it also creates incentives that reduce female participation in the workforce. Increased participation of women in the workforce is a source of economic opportunity for individuals and is a major driver of overall economic growth."

We had to read the above twice to make sure the government was serious when they produced such commentary. Really? This statement is shocking especially to members of our firm who have children and stay-at-home spouses. Without exception, the decision for members of our firm who have stay-at-home spouses was made for the betterment of the family as a whole with tax impacts not at all being part of the analysis for the resulting decision. To suggest that the income-sprinkling proposals will contribute to incentives for stay-at-home females to enter the workforce is nonsensical and offensive (notwithstanding that the authors are not economists and have not studied gender-based issues but instead rely on real life and common sense). 

In my opinion, such a nonsensical statement by the government is a direct attack on the single income family. There are many non-tax reasons why some families make the decision for the Mother to stay-at-home and raise the children. Usually such a decision is made with a lot of angst as to whether or not the family can afford it given the fact that in most cases such a decision comes with reduced income to the overall family. To suggest that income sprinkling for certain business owners “creates incentives” that reduce female participation in the workforce is simply wrong.

Rather than living in an economic fantasyland of studies that might suggest such is the case, perhaps such politicians or economists should embed themselves within a real “middle class” business owner’s home for a period of time to see if “income sprinkling” create incentives that reduce female participation in the workforce. What the politicians will no doubt find - as my colleague Kenneth Keung and I wrote - is that the spouse/common-law partner who stays home to raise children and manage the household is as much a key ingredient to the family’s success as the other spouse’s day-to-day hustle for the business. When you combine that with the further fact that non-active spouses/common-law partners have property rights with respect to family assets that have been used — directly or indirectly — to grow the business, is it really offensive from a tax-policy perspective for the non-active spouse/common-law partner or other family member to receive dividends or realize capital gains notwithstanding they may not have expended the same level of direct effort in the business as other family members? In my view, it is not offensive and simply reflects the fact that the family is the proper economic unit of society.

Concluding Comments

So there you go…..my list not yours. It’s easy for me to complain but I intend to do more than just complain. I intend on making contributions in any way I can to make Canada a better place. My strength is obviously limited to the practice and study of taxation and, therefore, I will find ways to offer assistance to politicians, government bureaucrats and others to hopefully make Canada a better place. If you’re concerned like I am, please find ways to make your contribution as well. Canada truly needs your engagement.