By Maurice Walch
I enjoy reading Andrew Coyne’s articles in the National Post. While I frequently don’t agree with his viewpoints, I enjoy his articles as they sometimes challenge my thinking. However, he recently penned a couple of articles advocating Finance Minister Morneau’s approach to “eliminating tax loop holes” for small businesses. Mr. Coyne’s desire is that everyone should pay the same rate of tax. The fact that seems to be lost on him, is that whenever a small business person actually takes money out of his or her company and puts it into their jeans, the same tax rates apply to everyone.
But why do I want to be his financial advisor? Well, many of my new clients come to me as the result of a referral from a satisfied client. My client’s ability to communicate their satisfaction is key to the potential client meeting with me. I think Mr. Coyne’s use of hyperbole would make him an amazing source of referrals for me. Let me explain.
Mr. Coyne stated, “The number of private corporations in Canada has soared in recent years, from 1.2 million in 2000 to 1.8 million in 2014.” Soared? Really? This implies an annual growth rate in the number of small businesses of 2.9 per cent over 14 years. The Financial Planning Standards Council estimates 3.92 per cent to be a reasonable rate of return to be used as a planning assumption for a balanced portfolio. If Mr. Coyne considers 2.9 per cent a “soaring” increase, I want to manage his portfolio for him so he can tell his friends that his portfolio and net worth is soaring as a result of my good work.
In continuing his diatribe on the unfairness of the existing tax system, he states, “The number of corporations, many of them sole proprietorships — doctors, dentists, and the like — has mushroomed.” Can you be a bit more specific Mr. Coyne? Would you like to speak to the number of geologists, engineers, technicians, and energy service people that have created sole proprietorships because they have been laid off? Between 2015 and 2017 the oil patch lost 52,500 direct jobs and thousands of indirect jobs (Enform 2017). Many of the people have started new companies as they haven’t been able to find a job and so have created one. We have seen this movie before in Western Canada and we know that some of the sole proprietorships may grow to be the next Precision Drilling or Canadian Natural Resources. Last time I looked, these were of tremendous benefit to the federal tax revenue base, so much beloved by the recipients of equalization payments.
He also trots out perhaps the most galling of expressions spouted by government officials when he says the cost of these “loopholes” to governments is at least $250 million to the federal government. This implies the money we earn is not ours, but the governments and they just allow us to keep some of it. The problem, according to Mr. Coyne, is that current tax structure leaves an extra $250 million in the pockets of the small business person that could be redirected into the government’s hands.
Rightly, Mr. Coyne received a lot of negative mail from small business people and tax professionals. As a result, he penned a follow up article in which he stated, “Grateful as I am to the many who took the time to instruct me in the concept of limited liability…The question is whether the tax system should artificially encourage incorporation — whether, among the manifold benefits of incorporation should be included a juicy tax preference.”
While not as eloquent as his question, the simple answer is “It’s the payroll stupid!” If he was truly paying attention to his lessons in limited liability, he would have understood the implications of it. Many small business people will set up an operating company to run the day-to-day aspects of the business but also have a holding company own the shares in the operating company. When times are good they can squirrel away some money into the holding company. By doing so they protect the funds from being accessed in the event of a lawsuit, thereby taking advantage of “limited liability.” If the small business runs into difficult financial times, the operating company can bring back the money from the holding company to meet its payroll and other operating expenses. Many business owners forego contributing to RRSP’s so they can leave money in the company for a rainy day. If good luck prevails and that rainy day doesn’t come, then this is often the only retirement asset the business owner has. When it comes out of the company account, the business owner pays tax like everyone else.
Mr. Coyne goes on to say, “Good tax policy, then, far from deciding what sectors should flourish, is about removing the influence of the tax system on decision-making.” I agree. Government should not decree what business should flourish and which ones shouldn’t. They are just not good at it. Look at the fantastic job Gerald Butts (Trudeau’s senior advisor and long-time friend) did in Ontario with the electrical system while he advised the provincial leaders on what businesses should be supported. However, he again misses the point. The small business issue at debate here is not what type of company is going to flourish. The issue is whether we create an environment where any type of small business can flourish, or if we want to starve them out.
According to the 2016 Statistics Canada figures, more than 90 per cent of Canadians working in the private sector work for small businesses while 88 per cent of newly created jobs in Canada (between 2005 and 2015) were attributable to small businesses. If Mr. Coyne thinks a 2.9 per cent annual increase in small businesses is a soaring figure, I wonder how he might describe the massive value small businesses bring to the Canadian economy.
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