On July 18th of this year the Finance Department released proposal relating to the taxation of private corporations in Canada. The stated goal was to ‘level the playing field’ and eliminate unfair tax advantages enjoyed by Canada’s wealthiest taxpayers. They have tried to suggest that this will only affect the so-called ‘one per cent’.

I actually applaud the Finance Minister’s intentions here. The problem is that their proposals are very poorly thought-out. I have already seen the damage for one of my small business clients.

The business community and the tax administrators have a kind of necessary competitive tension. Sometimes this translates into Finance drafting measures in an attempt to win. The proposals are very complex and pretty much impossible to discuss intelligently with the uninitiated.

I have the benefit of more than 30 years of experience working in the income tax field. I’ve been a tax auditor with the CRA, a senior manager in a tax specialty with one of Canada’s Big 4 accounting firms, taken the CPA’s In-Depth Tax Course and spent 3 hours of professional development time this summer studying the proposals. The proposals are complex and cannot be discussed intelligently in the media or on talk shows.

The average citizen simply doesn’t have any idea about the theory of tax integration. The tax system was designed generally so that it shouldn’t matter whether income of a certain kind was earned directly by an individual, or through a corporation and then flowed out to the shareholder as wages, dividends or whatever. Mostly this works.

Perhaps because technophiles in the Department of Finance believe they have out-smarted the competition, they are not open to change and are instead hunkering down trying to withstand the massive backlash this has caused in the business community.

I represent a small business client who recently sold his business after about 10 years. The value in the business was a combination of goodwill and intellectual property. All in all, pretty standard for a service-based businesses (software in this case).

So of course he would simply use up his capital gains exemption right?

Well no.

That is actually pretty hard to do. No lawyer worth his salt would allow his client to purchase shares in a privately held corporation. They would invariably be worried about skeletons in the closet – and rightly so. That is one of the main problems with the capital gains exemption.

The business community needs to urge Finance to consider better legislation to facilitate arm’s length sale of assets when a small business owner sells his business. Small businesses are mostly service businesses, and their assets typically intangibles like goodwill or intellectual property. Nobody likes to pay very much for these kinds of assets, since the purchaser can’t deduct the costs very efficiently.

The capital gains exemption was introduced by a pre-Harper conservative government. Typically it was aimed at wealthy Canadians. It originally allowed for a $100,000 tax-free capital on public company shares and other passive investments. Heck I even got my late father to benefit – even though he didn’t really need it. While subsequent governments eliminated the $100,000 portion related to passive investments, the program has continued and even been expanded for qualifying small business corporation shares amongst other things.

However it remains awkward to use in true arm’s-length sales. Predictably the accounting profession has worked long and hard to find ways to use it for estate planning with their high net worth clients. In their lust to defeat this kind of tax planning, the Finance Department has proposed fiddling with rules related to the capital dividend account. That might work to defeat some of the more egregious tax schemes for high net worth taxpayers.

However it would also cause excessive – and I believe unintended – tax to be payable by my client trying to sell his software company.

The worst thing about these proposals however is the way in which the Liberals have allowed technophiles in Finance to score points against their adversaries in the accounting profession – instead of building good tax policy. The Liberals lost sight of “sunny ways” when it comes to tax fairness.

It attempts to address benefits enjoyed by one – admittedly annoyingly self-entitled – part of society (i.e. wealthy professionals). However it also ignores another equally smug and self-entitled group of Canadians:

Public sector workers who enjoy health benefits and indexed pensions that are the envy of everyone in the small business world.

I live on Pender Island which is a strange mixture of farmers, small business people, former hippies and retirees from the public sector. Retired government employees will support the proposed measures because it targets someone else and ignores fact that public sector workers in the province routinely take early retirement and have the benefit of full health coverage and indexed pensions for the rest of their pampered lives. The small business community is already taking aim at public sector workers, as they gear up to fight these proposals.

The Finance proposals are playing to the politics of envy. Instead the Government needs to look at evidence-based policies to improve tax fairness. They need to embrace the notion of “sunny ways’. If the Government can avoid vilifying Donald Trump in public for the sake of NAFTA negotiations, surely they can do the same for Canada’s wealthiest professionals in the interests of developing a fairer tax system.

Instead of punishing tax professionals and their high net-worth clients for developing innovative new tax planning strategies – render many of them expensive and pointless by extending income splitting to ALL Canadian couples. Heck – if you think of it, it’s only reasonable. And it will benefit public sector employees, seniors and the 45% of BC residents who work in small business.

Do they want to go to the electorate in 2 years having alienated 45% of the population (i.e. the self-employed and people that work for them)?

In the same way, instead of penalizing public sector employees by taxing their (gilt-edged) benefits, allow ALL Canadians to directly deduct medical expenses from income. This would be a vast improvement on the miserly tax credit available to most of the self-employed AND their employees (in BC 45% of working population). It would also be important for seniors who don’t have indexed, public sector pensions and health benefits.

Stephen Harper started using the CRA as a weapon against environmentalists and anti-poverty groups. I have already seen the beginnings of the politics of envy amongst CRA auditors, who appear to be using their powers arbitrarily against small business owners. This invariably is felt by small business owners who don’t simply get T4s from their employer. Unlike employees, the self-employed have to self-assess tax. Navigating the complexities of GST, PST, payroll (think of the “Phoenix Payroll System” debacle) and income tax isn’t for the faint of heart. I could relate numerous anecdotes in the last year or so, within my own practice.

My point is, let’s keep it positive (‘sunny ways’). Speak to the value of ALL Canadians, whether they work for large businesses, government or for small businesses. Don’t pit one group against another. That kind of divisive approach won’t end well.