How Bill Morneau found himself at war with small business

The finance minister’s call for tax feedback unleashes vocal pushback from incensed lobbyists and political opponents
Minister of Finance Bill Morneau speaks to media as he delivers a fiscal update during a news conference, in Ottawa, on Friday, Nov. 20, 2015. THE CANADIAN PRESS/Adrian Wyld

Bill Morneau’s Twitter feed isn’t typically a place of high drama.

Nor is it usually a place of low drama—or any drama, for that matter.

Canada’s mild-mannered finance minister tends to use social media to document his public schedule (Aug. 18: “Proud to speak at tonight’s @epilepsytoronto Soiree. A fun night in support of a great cause.”) or to congratulate colleagues (Aug. 28: Way to go @GPTaylorMRD! It has been amazing having you on team Finance and I can’t wait to see what you accomplish as Minister of Health!).

But earlier this week, before feting Ginette Petitpas Taylor’s promotion, Morneau unleashed a tweet-storm unlike anything the followers of @Bill_Morneau had ever seen. At about midday Ottawa time on Monday, the finance minister’s account exploded with an eight-point response to the increasingly hysterical opponents of his bid to curb aggressive tax planning.

“The rules are designed to help businesses grow — not shelter personal income from tax,” Morneau said in tweet No. 1. “Canadians deserve #TaxFairness.”

To review, back on July 18, Morneau said he was considering closing three tax “loopholes” available to smaller companies, but closed to the rest of us. It was probably the first time that most salaried Canadians heard about “income sprinkling,” a perfectly legal scheme that allows owners of a business to allocate income to family members, and thus reducing his or her tax bill. The tax code also permits the owners of a corporation, however small, to use his or her company to shelter income from passive investments, and to convert surplus revenue into capital gains, which are taxed at lower rates than income.

READ MORE: Everything you need to know about the Liberals’ proposed small business tax reforms

None of these things jibe with Prime Minister Justin Trudeau’s idea of a just society. But Morneau resisted acting unilaterally. He said he would listen to suggestions for 75 days, implying a deadline of Oct. 2. That means the government could still change its mind and decide there is a societal benefit to allowing an incorporated consultant to dodge taxes by shifting some of his or her income to his or her teenaged children.

It took some time, but the small-business lobby has decided to go to war over the proposed changes. The Canadian Federation of Independent Business is on its way to dislodging the Dairy Farmers of Canada as the leading champion of special-interest entitlement. “What has upset business owners more than anything are the comparisons made between the income of small business owners and that of employees,” Dan Kelly, the federation’s president, said in an op-ed published at the Huffington Post on Aug. 25. Elsewhere, Conservatives are calling Morneau’s proposals a “tax grab,” and doctors are warning of diminished health care. An engineer named Bonnie Swift says the proposals are “sexist” because they will make it harder for women entrepreneurs to have families.

Absent from the backlash is any suggestion of how the government might otherwise achieve its goal of erasing some of the more egregious examples of privilege from federal policy. Also missing is any recognition that the tax system should be as neutral as possible. The decision to start a company should be made on the merits of the enterprise, not whether there are financial gains to be had by gaming the tax code. Third, a lot of the criticism relies on sentiment, which is poor way to make policy. The small-business lobby wants us to separate risk-taking entrepreneurs from the salaried class. But as Andrew Coyne argued recently in the National Post, the barista who pulls shots while studying for his or her PhD is no less a risk-taker than the one who decides to open his or her own coffee shop. The entrepreneur already benefits from a significantly lower rate of taxation than larger companies pay. That’s advantage enough.

Still, there must be some unease in Ottawa. Morneau’s sudden Twitter flurry suggests the Trudeau government is worried that it is losing a winnable debate. That’s because it forgot that the easiest way to take something away from someone is to offer something else in return.

Coyne noted that Morneau did little to address the root of the problem, which is the wide gap between the small-business tax rate and individual rates. Narrow that gap, and there would be a lot less dodging. If that’s too much, cut the tax paid by fast-growing companies, which are the ones outfits such as the International Monetary Fund say are deserving of special treatment. An offer of that sort would make it more difficult to say the Trudeau government only is looking to raise more money.

Morneau’s tweet barrage included some sweeteners. He stressed that his policy suggestions wouldn’t increase taxes, and he appeared to give a guarantee that entrepreneurs would continue to receive special treatment. “We have the lowest #smallbiz tax in the #G7 and we’re keeping it that way,” Morneau wrote. He also said the any family member who did legitimate work for the company would be unaffected, as would companies that use their profits to invest in equipment, research and additional employees.

That should be enough. But to the apparent surprise of the Trudeau government, and, frankly, to some of us who pay attention to these things, the opposition and the business lobby have decided to take a stand over a business owner’s right to squeeze as much as he or she can from the tax system. Everyone loves the idea of fighting income inequality. But Morneau is discovering that many of the people he’s marked as lucky enough to be able to give back don’t consider themselves so fortunate. It probably won’t be a fight he can win on Twitter.