The accountants are back in business. The latest revision of Finance Minister Bill Morneau's small-business tax reforms left the corporate income-splitting loophole a little wider, so some of those affluent families with private corporations will still find ways to shift income, and avoid taxes.
This was the last real new measure of the fall parliamentary sitting, and fittingly, it was another retreat on those controversial small-business tax measures – the biggest issue in the Commons this fall, and the most persistent political problem that Prime Minister Justin Trudeau's Liberals have faced in office.
For Mr. Morneau, shaving the edges off the income-sprinkling measures was yet another sacrifice to buy some peace before the holidays, but it's too late for goodwill. It was the end-of-session bookend for a fall political debacle.
Mr. Morneau's goal, to reduce the use of private corporations by affluent Canadians to lower personal taxes, was in principle a good one. A lot of it should have been politically saleable, too. But Mr. Morneau became mired in the pricklier aspects of the details, and took a beating from the small-business lobby, Conservatives and tax accountants. Mr. Morneau mishandled the politics, but don't expect to see any finance minister try to take on business tax reforms for a long time to come.
There's still one more chapter to come next year in Mr. Morneau's small-business tax climbdown, when he releases the revised tax rules for passive income held in private corporations. But Wednesday's changes to income-sprinkling measures make it easy to predict those will be heavily sanded down to smooth over complaints.
The plan to block the use of corporations for income sprinkling was never the aspect of Mr. Morneau's small-business plan that caused the political problems. Polls showed most Canadians favoured it. The average Canadian salary-earner isn't allowed to split income with a spouse or university-age child, and doesn't see why someone who owns a company should be allowed to do it.
But in the end, Mr. Morneau and the Liberal government were so eager to get through the small-business tax debacle, they rolled the income-sprinkling proposals back pretty far.
Some were little fixes. One allowed income splitting between a business owner and a spouse over 65, on the grounds that it would be similar to income splitting on pension income, which is allowed. But others open up broader opportunities for income splitting, albeit under conditions.
Someone who works 20 hours a week for their spouse's corporation for five years will be able to collect dividends from the corporation for the rest of their lives. That will open avenues for putting a spouse on the payroll as a part-time worker for a period and then benefiting from income splitting for decades. Tax accountants who feared the business of income-splitting strategies might dry up will find some room to work with in these new plans.
Mr. Morneau can still claim some progress in making it harder to avoid taxes by incorporating – and thus making the tax system more equitable.
But the Finance Minister suffered all the political damage and got a heavily watered-down version of the tax reform. The Liberals actually cut small-business taxes by two percentage points to mitigate the damage, and still walk away with a reputation for soaking small-business owners.
Mr. Morneau made the mistake of allowing himself to get stuck to the specifics before he had sold the principle. His department put out a discussion paper with draft proposals for the changes in July, but that was before he had done much to sell the goal of reducing the use of corporations to avoid personal taxes.
After his draft paper came out, he made it sound like he was committed to going ahead, with only minor changes possible. A discussion paper usually gives a minister the luxury of distance from the specifics, so that they can gauge support and later blame the most unpopular aspects on their bureaucrats. It should have allowed Mr. Morneau time to get his Liberal caucus onside before he took credit for the more palatable second draft. Instead, Mr. Morneau managed to take political ownership of every detail of every proposed scenario – and even the misinformation about the proposals.
The question about the Finance Minister is whether Mr. Trudeau and the Liberals will trust him to push a truly controversial proposal again. In the meantime, he's closing out 2017 in constant retreat.