Too far, too fast, and farmers won’t forget. The Liberal government’s corporate tax rule changes are bad politics, and in many ways, bad policy.
According to the last Census of Agriculture, only 25 percent of Canadian farms are incorporated. However, incorporated farms account for the vast majority of farm receipts.
With the reaction coming from the farm community, you’d swear every farm was affected. The changes are viewed as an attack on small to medium-sized businesses. You seldom see an issue that galvanizes and unites the farm community in this way. It’s reminiscent of the furor over a past Liberal government’s long gun registry.
In farm circles, only the National Farmers Union is defending the Liberal government. NFU president Jan Slomp has released an opinion piece saying it’s the wealthy one percent of society that is whipping up the hype against the tax reforms and that it’s “vitally important that tax loopholes are closed.”
“Only a very small portion of incorporated farms are profitable enough to warrant the cost of accountant fees to set up loophole arrangements,” writes Slomp, showing just how out of touch the NFU is with commercial agriculture.
While some incorporated farms will remain relatively unscathed, the crackdown on income splitting and the earning of passive income within a farm corporation will affect many.
It’s true that the vitriol over the proposed changes has become a little extreme, but that only speaks to the passion involved. The official consultation period is soon ending, but businesses don’t feel like anyone has been listening to their concerns.
Assuming some rebalancing of personal versus corporate tax rules is actually warranted, what should the government have done differently?
First of all, don’t call them tax loopholes. The rules are set up and people follow them. “Loopholes” makes it sound underhanded and nefarious.
If you decide that corporate tax rules need to be adjusted or tightened, don’t try to do it all at once. Addressing income sprinkling or passive income individually would have been ambitious enough without doing both and then adding rule changes on converting income to capital gains.
And while adjusting the rules, find ways to make the tax system simpler rather than adding to the complicated mess. For instance, the new Tax on Split Income (TOSI) assumes there is one corporate founder and that other family members receive income only to save tax. How will Revenue Canada reasonably determine whether a family member’s contribution is worth $30,000 or only $15,000?
And how exactly will passive income be tracked within a corporation so that it can be taxed at an onerous rate at some future time when it’s withdrawn from the corporation?
The government could have avoided a great deal of political fallout if it had moved more slowly, addressed one issue at a time with a detailed plan and truly consulted and listened to the business community.
Most Canadians and even most farmers are not incorporated, so it might be assumed that public opinion is on the government’s side. That doesn’t appear to be the case. An affront to small and medium-sized business will not make regular taxpayers any richer. Instead, it will have a stifling effect on the economy and job creation.
Beyond the issue of tax fairness, taxes in this country are just way too high. Despite backbreaking tax rates, huge budget deficits have become the norm. Rather than taxing more, governments need to spend less.