The revolution that is waiting

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Evelyne Couturier

Monday, 23 October 2017 09:42

UPDATE
Monday, 23 October 2017 09:47

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The doctors are angry. The owners of small and medium-sized enterprises are outraged. The reform of the federal tax system is far from unanimous. Not surprisingly, the groups who see their privileges erode are those that are most engaged and which means the most the votes. But their voices powerful are they right?

A reform of ethics?

A few days ago, Peter Dietsch, an economist and philosopher who teaches at the University of Montreal, has published a report that proposes an interesting perspective to evaluate the reform. Its aim is to analyse the reform from an ethical point of view. He first on the principle that a fair taxation regime should adhere to the principles of horizontal equity (people with the same income, before tax, should have an after-tax income similar) and vertical (people with a higher income should pay more tax, in proportion to their income and in absolute terms).

Peter Dietsch adds other arguments to evaluate the proposal currently on the table. He note that any tax system seeks to achieve four objectives :

· increase State revenues to finance its missions;

· redistribute income in order to have a more just society;

· to encourage or discourage certain behaviors;

· smooth the business cycles.

If there are breaches of the principles of fairness, it is necessary all the same that they help to achieve at least one of the other objectives. In the case of this reform, it is thus necessary to check both the horizontal equity and vertical, but also see what the objectives were consistent with the measurements at the origin, and if they are still relevant.

A reform in the three time

It is not difficult to see that the current situation does little to achieve tax fairness, in particular because of the unequal treatment of certain types of income. The effective tax rates of the richest, that is to say, the percentage of tax actually paid is much lower than the tax tables do suggest. Of course, there are several ways to correct this situation, which is not explained by one or two tax rules are poorly balanced. The government could consider a redesign more in depth, but this is not the case. In fact, it is rather a reform in sum shy. It is necessary to immediately scratch the lens to replenish the coffers of the State : it wants above all to make the system (slightly) more equitable.

What are these provisions that will be changed? Mainly, we talk about three things : the dusting of income (apportion the income of the company between the members of his family to benefit from reduced rates of taxation), private placements, tax-free (sleeping in a bank account rather than being invested) and the conversion of income into capital gain (taxed at a lower rate). In watermark, the reform aims at the individuals who chose to transform into a corporation that cannot be justified (except to save the tax).

The case of doctors is undoubtedly the best known. In Quebec, they were granted the right to incorporate in 2007, among other things, to comply with the practices of other provinces which had adopted the measure in order to avoid increasing the remuneration of doctors (good joke!). For most professional groups, it is, in fact, a reality that is relatively recent : the 27 groups have been granted this privilege since 2003. Without surprise, in the last 15 years, the professional services companies in Canada have more than tripled. For what reasons did we get here? The main argument is that international competition. Since everyone is doing it also, we also! However, nothing indicates that it reaches one of the goals of taxation set out by Peter Dietsch.

Some people call for caution, arguing that the taxpayers who will have to pay for this reform are the farmers and small business owners who rely on these rules to ensure their retirement or even pay members of their family who help out sporadically. Few tax practitioners have spoken out to explain the concrete impact of the reform and the details are still missing, but, according to Luc Godbout, it should only affect taxpayers with income in excess of$ 150,000. In other words, not the petty small business owners. This is an observation shared by Egbert McGraw, professor of administration and taxation at the university of Moncton. Only a minority of SMES and professionals incorporated will be affected. Furthermore, if three rules are changing, the rest of the system remains the same. It is far from a revolution.

Moreover, our tax system is complex and cumbersome, and it is not always easy to navigate. There are many rules and even more exceptions. Tax experts and accountants dedicate their lives to understand how to make people pay the least tax as possible to their customers, legally. The political parties are doing their election campaigns by promising tax cuts or gift tax. With the reform, some of these benefits would disappear. We can understand that some people are disappointed. Tax optimization is not only possible, but encouraged, and there, they are told that it will be necessary to find new strategies. However, it is difficult to feel solidarity with the “poor” contractor will not be able to salarier his daughter who does not, however, for him, or this “poor” doctor will not be able to save 20 000 to 30 000$ of tax (in short, save more than pays for most taxpayers) and threatens to cut service to patients to make more money.

Critics of the reform have managed to make themselves heard, at least in part. The minister of Finance reiterated this week its intention to reduce the tax rate of SMES from 10.5% to 9% by January 2019. It also promises to relax the rules as to not disrupt the intergenerational transfer of his business, his farm or his property fisheries. Then on Wednesday, we learned that the first$ 50,000 of income earned by a canadian-controlled private corporation would still be taxed at a rate more advantageous to allow the use of this mechanism as a cushion in case of parental leave or illness, retirement, or simply unforeseen financial challenges. These adjustments seem to directly respond to the concerns laid out by the SMES, but does not change the nature of the (timid) reform. That said, at the rate of three micro-measures hyperciblées at the same time, we are far from a tax system that is really fair. Remind also that we are talking about the same government that refuses to tax Netflix and that is not really on the tax havens.

The party, however, is far from over : the teeth of the reform could be even more blunt. In fact, the people who benefit the most of the three tax measures will certainly not be allayed by the small touch-ups announced this week that pertain to the gagnepetits. The next round might play out in the scenes and seems to be beautiful and well-be already begun. Nothing to be optimistic…