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On the matter of fairness, taxes and emotion

The government has no case on the matter of leaving capital in a small business and making diversified investments.
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Michael Atkins, president, Northern Ontario Business

“Many Canadians find our tax system unfair, and I agree with them. They realize that taxes are necessary to pay for important government services, but they feel that rates of tax are too high. They sense that others, the well-advised or the wealthy, very often pay less than their fair share.”

That’s not Finance Minister Bill Morneau. That was Allan MacEachen introducing his 1981 federal budget to the House of Commons. 

A big focus that year was to raise more money and to eliminate tax loopholes. 

MacEachen was one of the cagiest most experienced politicians in the land, but his instincts completely abandoned him on this budget. 

He was Pierre Trudeau's deputy prime minister. He was out of the Finance Department within a year, although he landed as the Secretary of State and eventually made his way to the Senate as leader of the Opposition. 

He was run out of Finance by a business community that was outraged. In fairness, he was also bringing some pain to the oil and gas industry at that time and it was a general corporate tsunami that ensued.

The Liberal party had no idea what hit them as they tried to walk back most of his budget. In 1984, they were decimated by Brian Mulroney.

Our current federal government has decided that small-business people are getting unfair tax advantages by employing or distributing dividends to family members who are not doing actual work for the company and doing so at a lower tax rate. 

They're also saying it is unfair to leave capital in a small business and deploy it to passive investments (stocks and bonds, etc.), as it is taxed at the small business rate (15 per cent).

I have no horse in this race. I did not take the advice of my accountants to establish the infrastructure that allows you to deploy funds in this manner. 

This is a very big issue for doctors, lawyers, professional service providers. Many of these folks who are smarter than me have become accustomed to this infrastructure and the benefits that accrue.

The question is: what is fair? 

The government has no case on the matter of leaving capital in a small business and making diversified investments. 

As it stands, small-business people pay taxes twice: the first time at 15 per cent for money earned in the company, the second time when you draw money out of the company at your personal tax rate. 

There is no unfair advantage in this circumstance. 

Money left inside a small business is only there for three reasons: a) to expand; b) to keep resources for a rainy day, and c) to help fund retirement. 
There are no gold-plated retirement programs for small-business people.

The matter of providing income or dividends to family members who are not working in the company is a tougher question. 

Doctors, for instance, feel they pay a high price to be in their field. 

They work long hours, they start their careers with substantial debt, and their income is limited by government fiat. 

They were specifically encouraged to adopt these advantages by the Ontario government in lieu of higher fees.

Why anyone else who is not paid by the government should be able to form companies with special shares and pay dividends to family members who do not work for them is difficult to defend.

At this point, it is a matter of principle vs politics, two notions generally at odds. It's possible, although unlikely principle will prevail, in which case the Liberals will deprive doctors and lawyers of these tax advantages in spite of their extraordinary political power.

It is possible the Liberals have done the political calculus and believe this strategy will grab more NDP voters than they will lose to the conservatives. Most likely, they will put some water in their wine and pray for short memories.

I like Justin Trudeau. He has been a welcome relief from Stephen Harper. 

That said, like his father, he has never experienced that clammy ominous goosebump-inducing, hair-raising sweat on the nape of your neck when you pick up the phone and it is your bank or largest customer and you know instantly your life has changed dramatically — and not for the better. This is called risk.
Not all income is created equally. 

What, exactly does the government want to encourage?



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