Canada’s new tax reforms are anti-growth, this economist says

Jack Mintz, President’s Fellow with the Haskayne School of Business at the University of Calgary, says that instead of putting up its new proposals for tax reform this summer and then backing down on some and making changes to others, the federal government would have been better off leaving things as is.

“We’ve actually taken a step forward and two steps back in terms of reforms,” says Mintz, who argues that what the government may have gained in terms of fairness with the new measures they’ve lost as far as complexity goes and the promotion of economic growth.

Finance Minister Bill Morneau is having a busy time of it these days. Before meeting the press this afternoon to get grilled over his business assets, the minister was at a farm in Erinsville, Ontario, this morning to present yet another pull-back on the government’s tax reforms.

First proposed in July, the proposed measures have been attacked not just for the tone of their delivery (said to have framed well-meaning, hard-working small business owners as potential “tax cheats”) but more importantly for their substance, which critics say would make it more difficult for incorporated individuals such as doctors, farmers and fishers to make a living.

In response, and hoping to be seen as amenable to constructive feedback, the government duly backtracked, first by restricting provisions against income-sprinkling so as not to affect the lifetime capital gains exemption, then by touting a cut to the small business tax rate and, today, announcing that it was fully dropping one of the three main proposals: the restriction against converting dividend income into capital gains so as to save on the tax rate.

“We heard from business owners, including many farmers and fishers, that the draft legislation on converting income to capital gains – which was part of our consultation – was too broad and that it could create some problems for intergenerational transfers of businesses and farms,” said Morneau. “So what I’m announcing this morning is that we’re going to take a step back and reconsider that aspect of our tax reform proposal,” he said.

Good enough? Not really, says Mintz, who claims that although a large portion of the initial reforms including the measure on income splitting have now been pulled back, what we’re left with is more of a mess than we had before.

“Half the proposals have now been eliminated that people were really upset about,” says Mintz, in conversation with BNN. “I think most people would agree that income splitting with adult children at least with respect to dividends was appropriate to curtail, but I think there was a lot of concern over the spouse because the spouse shares a lot of the risk involved with the business anyway.”

But Mintz says that not only does the olive branch of a lowered small business tax rate not amount to much (it’ll entail a parallel rise in the dividend tax rate, anyway, he says) but the overall effect of the reforms as they stand will be anti-growth.

“The point I keep hammering about is that if you get larger as a small business, you end up paying a lot more tax,” says Mintz. “If you try to grow your business from $10 to $20 million, your effective tax rate will go up by about five points.”

“You’re really still having a system that discourages growth, and nothing has been addressed with respect to that,” he says.

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