May 11, 2018

Minister Morneau, your analysis is irresponsible and flawed, again: a CATA Op-Ed, Elliott Levine, President, Levine Financial Group

Flawed Canadian Tax Policy

The liberals have spent the better part of the past six months telling Canadians that they want a fair tax code or “level playing field”. Their focus is to make the middle-class equal to business owners from a taxation point of view because they believe this is “fair.”

Small business is the engine of the economy, we employ 70.5 percent of the private workforce. As a small business owner, our clientele are physicians so I have studied the impact of the proposed tax changes on our bottom line and that of my clients, the people responsible for saving lives.

The small business tax rate is 13.5 percent on the first $500,000 of active business income. Active business income over $500,000 is taxed at 26.5 percent. Income from investments in a private corporation (referred to as passive investment income) is already taxed at 50.17 percent.

Under the 2018 budget, the income subject to the small business tax rate (13.5 percent) will be reduced when passive investment income is greater than $50,000/year. If passive investment income exceeds $150,000/year, all active business income will be taxed at the top rate of 26.5 percent.

What is the impact to your bottom line?

  • Old Rules: Under the old rules, the first $500,000 of income used to be taxed at 13.5 percent. Total tax on $500,000 of active business income = $67,500 ($500,000*13.5 percent)
  • New Rules: Under the new rules, let’s assume you have accumulated investments in your corporation and are earning $150,000/year in passive investment income. Total tax on $500,000 active business income = $132,500
  • Difference $65,000/year in additional tax. Over a 20 years period, if you earn a 5 percent return on investment, your retirement nest egg has been reduced by $2,150,000.
  • Furthermore, the proposed income splitting rules will no longer allow a business owner to pay his/her spouse and/or adult children dividends.
  • When Morneau announced the original tax proposal in July 2017, he committed the government to grandfathering those who had already built up passive investments. Now he has said this no longer applies. Can you imagine the public outrage if an insurance company (RBC, Manulife or Sun Life) said one thing to their policyholders and then did another?

Government is in the business of running the country. The fact is Morneau hasn’t put the appropriate analysis into his proposed changes and the analysis is irresponsible and flawed, again.

The last time there was a significant tax change in Canada was 1962 and it took 5 years for the Carter Commission to make tax recommendations.

Morneau has taken just 73 days and keeps changing his proposals. The newest proposal (now revised three times in six months) is unfair and flawed, again.

Fairness should be judged based on treating someone reasonably based on their investment, experience, training and education. Morneau’s comparison between small business owners and the middle class is incomplete. He fails to consider the investment, education, experience, and total compensation which includes group benefits at retirement planning. Simply looking at the income tax paid is irresponsible and society expects more from a Minister of Finance.

Now What?

I was in Ottawa earlier this week and listened to Andrew Scheer, leader of the Conservative Party. He said two things. First, the proposed changes from the most recent budget have not passed into law.  Second, push your local MP and his local MP as this will continue to put pressure on Morneau.

Elliott Levine is President, Levine Financial Group specializing since 1967 in dealing with Physicians’ insurance, tax, wealth and estate planning issues. Mr. Levine is a community spokesperson for CATAAlliance on tax, finance & entrepreneurship.

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