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Kevin Milligan is professor of economics, University of British Columbia.

The debate on the taxation of private corporations has raged for months. As the consultation period comes to a close, how has the debate changed our understanding of the tax system, and what steps should Finance Minister Bill Morneau take next?

First, the debate has clarified and strengthened the case for the goals of this reform package. It's not good tax policy to allow incorporated Canadians to sprinkle income around their families solely as a way to avoid taxes. Tax breaks for entrepreneurs are fine; but entrepreneurial incentives should not be geared to family type. Neither is it good tax policy to push Canadians to use corporate structures as repositories for long-run savings portfolios. Corporations should be focused on productive investment in their active businesses – that's why society has corporations. Let business be business and pensions be pensions.

Second, we've seen how complex any tax reform can be. When new rules are cast broadly, specific cases can arise that get unintentionally caught in the net. What happens if a partnership sells to a corporation held by a trust in the year following the owner's death? I don't know – but real people confront such situations and reasonably demand clarity. Of course, tax law that tries to deal with every possible contingency becomes not just extraordinarily complex but also so rigid that clever tax planners soon invent new structures to get around that which has been proscribed. Tax reform is not for the faint of heart.

So, the reform package as I see it embodies sound principles that have survived the froth of the debate, but raises complexities for implementation that remain daunting. What should happen next, and how should lofty principles and on-the-ground complexity be balanced?

I think the case for action remains strong. The use of tax planning through private corporations is growing – the share of our economy organized through private corporations has more than doubled over the past 15 years and it is not clear what benefits this large shift has yielded the Canadian economy. Moreover, with the use of tax-planning techniques so heavily concentrated among high earners, the fairness of our tax system comes into question. Canadians need to be confident that we are all subject to the same tax system.

But any action must be balanced by the administrative and legal realities of implementation and transition. As one example, the tax implications for succession planning for farmers and other business owners needs to be clarified and fixed. If the legislation can't be fixed, some elements of the proposals must be tightened or pulled back. As another example, we need precision on the record-keeping rules for paying dividends to family shareholders so that we can ease the paperwork burden on small business. I hope to see these and other concerns addressed by Mr. Morneau in the coming weeks.

However, we cannot allow concerns about complexity to freeze us from taking action. Any tax change involves transition, and we can't simply resign ourselves forever to be stuck with the status quo. The right way forward will balance the difficulties of transition with the gains from making progress toward our goals for the tax system.

In the longer term, Canadians must accept the reality confronted by former finance minister Edgar Benson when he introduced our current small-business tax system in the 1971 budget speech. Mr. Benson warned us that allowing different tax rates for one class of firms will open the door to the kinds of tax-planning proliferating today. He argued that this door was worth opening, so long as we stay focused on providing tax assistance to Canadian firms investing in their own growth.

Going forward, we must choose one of two possible paths. We could choose to shut down the small-business deduction and help new and growing businesses in other ways. This solution was recently implemented in Britain, which extinguished the tax-rate gap between large and small business. The other possible path is to live with the challenges the lower small-business tax rate entails. This means we must struggle with the kind of messy-but-necessary patches and fixes that we see in the current reform package. Either path is viable; neither is easy. But we must choose one or the other.

Author's note: I advised the Department of Finance on tax matters in 2016, but I was not involved in preparing the current tax reform package.

Finance Minister Bill Morneau says there is misinformation circulating about the likely impacts of Ottawa’s tax reform plans. The proposed changes have drawn criticism from those who use incorporation to reduce their tax burden.

The Canadian Press

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