Remember Elbowgate? That time when Prime Minister Justin Trudeau lost his cool, stormed out of his seat in the Commons, and while moving faster than was prudent on the wrong side of the aisle, elbowed NDP MP Ruth Ellen Brosseau in the chest?
During Monday's press conference on small business taxation, held at an Italian restaurant hundreds of kilometres from Parliament Hill, a related species of exasperation often flashed across Mr. Trudeau's face and ran through his voice. The tax issue has been dogging the government since it put forward a confusing reform proposal in July, one which left large numbers of small business people wondering if they were about to be hit with a big, stealthy tax hike. But now, here was the PM announcing that his government had fixed all that.
Only problem: Reporters also wanted to ask questions of Bill Morneau, who is after all the Finance Minister; the PM for a time testily refused to yield the podium. And journalists had questions about the revelation that Mr. Morneau's private business holdings are not in a blind trust; the PM would clearly have preferred to talk about all the wonderful things his government is doing for small business.
But because of the way the government is rolling out this latest policy iteration, Mr. Trudeau could only offer half-answers and platitudes on that topic, which the press conference was supposedly about. The Liberal plan is to slowly tease out the tax reform details over several days.
That's right: To put to bed an issue that has been wounding the government since the summer, it has decided to keep it alive and kicking for at least the rest of the week. Many specifics of the plan are still to come. No wonder the PM is losing patience. Goals keep going into his team's net, and the opposition isn't even shooting.
The one thing Mr. Trudeau's government wants you to know is that, in response to all the blowback it was getting on plans to close small business tax loopholes, the small business tax rate is going to drop from 10.5 per cent to 9 per cent.
The one thing we would like to know is: Why is this the first time the government is even mentioning a small business tax cut?
After all, it's what the Liberals promised in their 2015 election platform: They said they'd lower the tax rate to 9 per cent, while closing loopholes to "ensure that CCPC status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses." Yet when this summer's tax reform proposals came out, they included only the second half of the equation. Why?
The government was and is right to worry about the growth of the CCPC structure, the use of which has boomed over the last decade. It has boomed for an obvious reason: Thanks to a steady reduction in corporate tax rates, there's a huge gap between the top marginal tax rate for personal income and the business tax rate. And small business tax rates are even lower than regular business tax rates, making it attractive for many upper-income earners to set themselves up as small business corporations.
Yet the government's move to lower small business taxes by another percentage point and a half will only further increase that tax gap, creating new incentives to incorporate. Is that such a great idea?
It may be a political winner, particularly compared to what the government first rolled out. But it's an ironic end for a tax reform that was supposed to be about reducing incentives to incorporate. The government is basically trying to plug leaks in the small business dike with one hand, while shaving down the height of the embankment with the other.
Three months ago, the government started this exercise from what should have been a safe place. In theory, similar income should be taxed similarly. Tax scholars agree, and most voters can see the logic. Most voters also aren't benefiting from the wrinkles in business tax law.
The government is right that a combination of low small-business tax rates, and a fairly generous interpretation of how some of the benefits of incorporation could be used, has created a situation where some Canadians are able to lower their taxes, or make tax-beneficial transfers to family members, simply by the stroke a pen.
Those able to do this, in ways the tax system allowed but never intended, are generally though not always upper income; for most others, the hassle of incorporation isn't worth the payoff. But starting from Day One of this reform, way back in July, the government did such a poor job of explaining what it was up to, and why, and who would be affected, that panic spread across the land. And some aspects of the government's scheme were so poorly conceived that there was a genuine fear that, in the pursuit of loopholes, the Liberals were going to impose big new compliance costs on all small businesses.
So what does the government's new plan, as of Monday, add up to? Details are still pending, but what has been announced so far is a climbdown, with perhaps more to come.
A tax cut the Liberals took off the table long ago is suddenly back at the top of the menu. At the same time, the push to close tax loopholes has been scaled back. The idea of reducing the use of the lifetime capital gain exemption? That's no longer on. Income sprinkling? The new plan for restricting it may actually enable it. Stay tuned.