When it comes to paying taxes and avoiding paying taxes, I have a little concept I call the “too good to be true” rule. When a friend says, “My money man has this slick investment move that makes me great money, tax-free,” my response is not to ask for the man’s name. Instead, I file it in the “too good to be true” bin and go on my humble way.
My subject, of course, is the tax changes introduced by PM Justin Trudeau and Finance Minister Bill Morneau, which have incensed people who incorporated to reduce their taxes. But let me go back first to another time, 2006–2007, when investors were similarly boiling because the Harper government had reversed one of its own tax policies.
In 2007 Finance Minister Jim Flaherty announced a tax (to take effect in 2011) on income trusts. Companies had been converting themselves into income trusts to create an almost tax-free situation. Money men had been urging their clients to buy income-trust-based financial instruments for their registered savings plans. And here came my friend telling me how much money he was making on his now income-trust-heavy RSP. His earnings were indeed dwarfing mine but I didn’t run to my accountant, because my mind was yelling, “Too good to be true!”
It was the sound of a million wallets shrieking—like we heard when Trudeau–Morneau changed the tax advantages of incorporation.
And it was. Though Harper won in 2006 saying he’d never tax income trusts, he did exactly that in 2007. Why? Because he saw that balancing the budget was impossible when billions of potentially taxable dollars were escaping into income trusts. The shine came off these retirement investments immediately. The income-fund sector of the stock market lost 15 per cent of its value in a matter of days after Flaherty’s announcement.
My friend went from making great money to losing good money, while my little RSP continued to limp along in its unspectacular manner.
When Harper–Flaherty imposed the same tax on income trusts as on corporations, a howl arose from all those who’d been making money on them. It was the sound of a million wallets shrieking, much the same as we heard when Trudeau–Morneau revealed plans to change the tax advantages of incorporation.
Maybe ask yourself this: Why was it OK for an ordinary taxpayer to become an incorporated taxpayer and immediately enjoy a lower tax rate? Also: Did it ever make sense to hire your spouse and children, list a bunch of things they supposedly do, and thus “sprinkle” your income and reduce the family taxes? Did it make sense for the government to have such a rule, then not check to make sure everyone was doing the work they were said to be doing? But these were the rules, and people acted in their best interests.
Family farms and ranches are a different case. They often benefited by incorporation or trusts, which were a way to transfer their operations to their children and keep them intact. People in favour of the tax changes say small farms aren’t affected, because the $1-million exemption on farm capital gains will remain. I wonder if these people have looked at a real estate page lately. Ten acres and a house is often over a million. A two-section farm, not big by farm standards, is probably worth well over a million. If inheritors must pay capital gains on the rest, they’ll probably have to sell land. What’s left may not be a viable farm. No farmers means no rural communities. Think about that.
Have you noticed I started out sounding like I’m in favour of the new Liberal taxes? And now I sound like I’m against them? The old rules on taxing people who incorporate may have been foolishly generous. Changing them might be a good idea. But the government’s representation of those who profited by the rules as being wealthy exploiters of a tax loophole—using, as Morneau called it, “fancy accounting schemes”—is more than a bit over the top.
As a kid, I observed the rattling speed with which my parents and other farmers figured how best to play any new government program. They were brilliant at it. When the government goofed and the farmers made too much off that goof, the government changed the rule. Railing at farmers for illustrating how a rule could be manipulated would have been stupid. Why not just admit your error? What is a loophole, anyway, but a government idea that backfired or became politically unpopular?
While I do think the government owes farmers and ranchers a way to keep their operations intact, I really do wish that other beneficiaries of incorporation would recognize that some benefits have been “too good to be true.” Also in need of calming down is the Liberal government. Their shrillness about an officially condoned tax structure is ridiculous.
Returning again to farmer-logic, I remember being a teenager who had his first industrial summer job. I was whinging to my farmer father about paying taxes. He said “When you have to pay taxes, it generally means you can afford to pay them.”
Fred Stenson’s most recent novel is Who By Fire (Doubleday).Other books include The Trade, Lightning and The Great Karoo.