Tax reforms for private corporations need to be phased in, not slapped down: Jonathan Kay

"Right now, [Canadians] have a system that encourages wealthy Canadians to use private corporations to pay a lower tax rate than middle class Canadians," Prime Minister Justin Trudeau told the United Nations General Assembly this week. "That's not fair, and we're going to fix it."

One can only assume that attending delegates from around the world were on the edge of their seats. If there's one thing that kills at the UN, it's a granular discussion of domestic tax policy.

Or so one might imagine, based on the intenseoutcry from Canadian small business owners doctors, especially who have mobilized in opposition to tax reform for private corporations.

'Shaken. Betrayed'

In an opinion article entitled "Trudeau's sinister stand against doctors," for instance, a Georgeton, Ont. family physician declares herself "Shaken. Betrayed. Ashamed for my life's work." She claims the proposed tax changes mean it is now "open season on doctors," and that the prime minister has "mocked my family's sacrifice."

While such claims may seem over dramatic, there is no doubt that the new tax regime, if enacted, will cost small corporate business owners a lot of money.

Free-market advocates, such as Andrew Coyneat the National Post, argue that the existing tax benefits for small corporations make no sense: "There are lots of good reasons why someone might wish to incorporate. There is no good reason why the tax system should, in effect, pay them to do so."

And he's right. Which is something to keep in mind if we ever get the opportunity to tear down the tax system and create a new, more logical one its place (as the Americans doevery 30 years or so).

But that's not what is being proposed here. Instead, the government seeks to rewrite some very specific sections of the tax code, targeting a very specific set of existing corporate arrangements, in a way that will dramatically affect a very specific set of earners.

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The government argues that the existing arrangement gives an "unfair tax advantage" to professionals whose income and circumstances permit them to use small corporations. And that, too, is perfectly true. But that unfair advantage already has been imputed into the many contractual decisions that these professionals have made since the current tax structure was put in placein 1972.

Over the decades, theOntario Medical Association and its other counterparts across Canada have repeatedly renegotiated the rates they receive for providing medical services and these negotiations always have taken place in the shadow of the governing tax structure.

Bargaining without tax advantages

According to2014-2015 data, Canadian family physicians billed about $46 for an average service. All other factors held equal (including the relative bargaining positions of both government and doctors, and the possibility of losing doctors to other jurisdictions), what would that number be without the tax advantages they enjoy under Canadian corporate law? $50? $55, $60?

We can't know for sure. But we can be almost certain that it would be higher, since doctors like everyone else will always be focused on the after-tax portion of their income, and so negotiate their fees with that index in mind.

The larger point here is that when you change the fabric of a country's (or a province's, or a city's) tax law, you're not just changing the law itself. You're also implicitly reassigning the benefits associated with contracts, business decisions and even career choices that were made in the shadow of that law.

Trudeau tax plan under fire in QP

7 years ago

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While the Georgetown, Ont. physician whowrote "Our kids are not going to be doctors" may reconsider her position in a year or two, it's hardly a stretch to imagine that slashing 20 per cent from after-tax income opportunities, which is what these reforms will do for some, will cause families to reassess their professional choices.

That's not to say that we shouldn't strive for a more fair and rational tax landscape. But changes have to be phased in over many years a decade would not be unreasonable to give taxpayers a chance to reorganize their assets and renegotiate contracts in a way that accords with new policies.

A lot of observers have expressed surprise at howpassionate the argument about this seemingly technical area of tax law has become. But now that Canadians are having this discussion, it's worth broadening it to other areas in which sudden pivots in government policy upend the financial plans of Canadian wage-earners.

Reliance on the law

Many Canadian taxi drivers, to take one example, were completely blindsided by the decision of city governments to effectively ignore existing laws that grant monopoly rights to licensed cab drivers operating medallion cabs.

Free-market advocates offer all sorts of great Coyne-ian arguments in support of ride-sharing services such as UberX and Lyft. All of these arguments make sense in the abstract. But in practice, they serve to massively impoverish the taxi drivers who acted in good-faith reliance on the letter of the law by investing their life savings in medallions that are now close to worthless.

Taxi drivers are not a particularly influential constituency, which is why no one talks much about their plight. Doctors and other well-educated professionals are a different story, however (which is presumably why Trudeau felt the need to justify the case for tax reform, even when speaking to an international audience).

It's too soon to know whether they will prevail in their fight. But the case they're making is a sound one, even if some Canadians are having a tough time finding pity for people making hundreds of thousands of dollars per year.

This column is part ofCBC'sOpinion section.For more information about this section, please read thiseditor'sblogandourFAQ.