Prime Minister Justin Trudeau and his finance minister, Bill Morneau, may still think they can get away with the blatant double standard of hiking taxes on personal corporations, while at the same time shielding their personal family trusts. They preach endlessly about a concern for the middle class, yet the privileged few arrange for their progeny to clip coupons, untroubled by a looming burden on their fellow citizens in less favourable circumstances.
Spoiler alert: The Liberals will not be able to ignore much longer the widespread anger of self-employed Canadians who do not have the means to duplicate their betters’ tidy set-up. Particularly while pensioners, including former government employees, can split pension income with their spouses, while the self-employed without pensions cannot split corporate income.
The lucky Liberal duo, luxuriating roughly in the one-tenth of one per cent and one thousandth of one per cent respectively (“We few, we happy few, we band of brothers”), sternly informed us that “fairness” demands new tax reforms that include a punitive tax on personal corporations. Why? Because the much maligned one per cent is allegedly gaming the system. It turns out that the objects of their guilt-signalling are hardworking middle-class Canadians who follow the rules: doctors, farmers, mom-and-pop shop owners and cash-strapped entrepreneurs.
What about people who were born or married into “comfortable,” even fabulously wealthy families? They can afford to hire expensive tax lawyers whose professional mission is to exploit loopholes in our arcane and exceedingly complex tax code. That explains the popularity of family trusts.
Let’s take a look at how they work. A parent lends money without limit to a trust. It invests the funds, makes a small interest payment to the donor and then distributes (or “sprinkles,” to use the new pejorative term) the income or capital gains from the investments to the donor’s offspring. Assuming the beneficiaries are in a lower tax bracket than the donor, the total tax bill for the family is reduced. Whatever amount the trust does not distribute attracts the top individual tax rate of up to 53 per cent, in contrast to a threatened 73 per cent rate on passive corporate income.
How is that different financially from income sprinkling or passive income in a personal corporation? It isn’t, yet Morneau’s proposal exempts trusts. Furthermore, the fortunate trust-fund kids receive income or capital gains with no obligation to work or contribute to the trust. It is a gift, pure and simple. That is not a problem in itself, but why then penalize a farmer’s family members who receive wages for helping with the harvest? Or a shop-owner’s kids who are paid for watching the counter?
While legally distinct, the two situations are also identical from a fairness perspective. A mother or father transfers income to a son or daughter to take advantage of their lower tax bracket. If the mother is a doctor with a personal corporation, watch out. But if the father has the wealth to set up a family trust, his trust-fund relatives are just fine, thank you.
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