Recently our federal government—and specifically our Finance Minister—has announced that it is time to correct a great injustice.
The creation of corporations through which income flows has done a great injustice to the middle class who cannot take advantage of tax law to filter and screen their income into various streams for tax advantage. We are told it is simply not fair and equity must be brought back into the system.
The official opposition has been quick to point out the flaws in that logic, including rhetoric that this is actually an attack on the middle class due to the number of small corporations that will be affected, producing new inequalities in the system.
Through a combination of an overly complicated tax system and analysis that is wildly exaggerated by both sides, the true impact becomes pretty blurry.
As with most debates, the truth lies somewhere in the middle—or at least, in a location far from either point of view.
Our current system of taxation is not supposed to be fair. It is, by design, a system that takes into account one’s “ability to pay”—that is, those who have more can pay more. We have accepted this balance, begrudgingly, because a truly fair tax system would lead to collectability problems and ultimately fail to provide the funds needed by government.
Anyone who believes that equity and fairness are factors in tax policy is naïve. Our policy-makers take two factors into account: generating revenue and justifying its impact on the electorate. Fairness is merely the invention of spin doctors.
That’s not to say that the proposed changes may not do some good, and I say this as a corporate entity that will be adversely affected. There are absolutely aspects of income sprinkling, a policy the Liberals would like to eliminate, that while legally correct appear to be unfair. Because our system is based on a person’s ability to pay, distributing income to individuals who appear “less able” results in tax savings, and there are few checks, if such an arrangement is properly structured, to ensure that these individuals actually earned that income.
Yet in some corporations, including many family-run businesses like farms, these individuals do participate and they are rightfully due their share of the income and the advantage it brings. The challenge is that sometimes this contribution is non-traditional or difficult to measure. As such, the proposed checks and balances may make it tremendously difficult for these people.
But those same checks and balances will help to eliminate income payments to corporate “shareholders” who have no connection to the business and in many cases simply gift the income back to the primary controlling shareholder on a personal level.
Good may also be accomplished by the government by removing some people’s ability to build retained earnings, and essentially transfer their true income to a lower-taxed capital gain—but only if we can find some way to allow for legitimate transfers of family businesses, which is the reason why the tax code was written this way initially.
Entrepreneurial parents who have built a family business may find themselves unable to reasonably pass on their business to the next generation without significant tax challenges, and due to these challenges the next generation may be unable to complete the purchase due to financial constraints.
Yes, some unintended recipient corporations have taken advantage of this, but we must be sure not to close the door on the deserving parties simply to keep out pure opportunists and abusers.
In the end, while it may seem that fairness is an objective concept, it may be quite subjective. And any changes we make to level the playing field may create unintended inequalities or hardships.
These are potentials, but one thing is without debate: the motivation of government is not about equality, but rather the bottom line and creating revenue.
