The Federal Government recently embarked on a review of certain provisions of the Income Tax Act, presumably in an attempt to deliver on a campaign promise to address issues around perceptions of tax fairness during the 2015 election. Unfortunately they failed to deliver on an even more important promise during that same election “to make this election the last election based upon the ‘first past the post’ system”.

This is important because politics is a terribly divisive and partisan pursuit in this (and likely every) country. In the last election the Liberals received 39.5% of the vote. This compares with the 2011 election in which the Conservatives received 39.6% of the vote. In both of the last two elections, 100% of the political power was ‘earned’ by political parties representing less than 40% of the electorate. So the governing party need only convince around 40% of Canadians that their proposals are generally “fair” – which generally means “fair to their supporters”.

The problem with addressing perceptions of ‘tax fairness’ is that the Income Tax Act is incredibly complex and not well understood by many of us – and that includes politicians. The Income Tax Act (“ITA”) is by far, the most complex piece of legislation in Canada. It is generally best understood by professional accountants who are required to study it and often to work with it. As a CPA myself, I have studied and worked with the ITA for more than 30 years, and my practice is centred around tax and tax compliance for small business.

However I don’t mean to imply that I am an expert in working with high net worth Canadians and strategies such as ‘dividend sprinkling’ and the creative use of trusts. My practice is focused on small business – primarily technology companies – and I’m a specialist in the Scientific Research & Experimental Development tax credit program (aka “SHRED”).

The Liberal proposals will negatively affect most of my small business clients. It will inevitably increase complexity and hence compliance costs. This may not be a tax increase – but it will reduce income nonetheless. As a sole practitioner focused on tax, it may actually benefit me personally in some sense. However pointless compliance is not the kind of work I enjoy or take pride in.

For some of my clients however, there will be negative tax consequences not merely from this set of proposals, but also from the 2016 Budget which added excessive complexity to the determination of the Small Business Deduction (“SBD”). In 2016 the Liberals introduced the notion of “specified corporate income” in a misguided attempt to stop the multiplication of the SBD by loosely affiliated corporate ‘groups’.

This was the first of a series of unworkable tax proposals from this Finance Minister and this government. It is understandable that most Canadians don’t understand the issues with the calculation of the small business deduction. As a tax professional myself, I missed the significance of that measure at the time.

From March to June I am working flat out and simply thought that this was a minor technical adjustment. When I finally came up for air, I realized the significance and have signed up for a one-day professional development course on the subject of this, and other recent measures.

A great deal has been written about the Federal Government’s recent tax fairness proposals. Predictably most of it has been either incomplete, biased, self-serving or simply trivial. How could it be anything else?

The vast majority of politicians and political observers have opinions which they are happy to share with other Canadians. But neither they nor their audience generally has the requisite technical background to understand tax issues. I challenge most Canadians to intelligently discuss the meaning of the theory of tax integration or to describe in one or two paragraphs what the capital dividend account is and what it is meant to accomplish.

The term “tax fairness” rests not only upon a detailed understanding of tax theory, it also relies on a reasonable understanding of who working Canadians are, and what their wages, working conditions and benefits are.

The Liberals’ proposals attempted to deal with perceived advantages enjoyed by a small group of “wealthy Canadians who don’t pay their fair share of taxes”. They have ignored the circumstances of a great many other Canadians. I frankly believe that – like most Canadians – they don’t really understand the make up of our economy.

Most of us simply don’t understand the importance of small business. In BC about 22-24% of those who participate in the workforce, work in organizations with 4 or fewer employees. 


At the outset I should admit that my analysis is necessarily is somewhat ‘idiosyncratic’. I am a self-employed accountant with very little in the way of time or resources to spend on my analysis. I will therefore rely on credible information that is available to me and can help inform the analysis.For example, as a British Columbian CPA in public practice, I am familiar with an annual publication put out by BC STATS called SMALL BUSINESS PROFILES.

In order to understand the statistical make up of working British Columbians, I rely on this publication. I have used the 2016 version of this publication (based upon 2015 statistical data) in my analysis.

Canadian statistics will be different. I understand that BC has a somewhat higher percentage of people engaged in and employed by small business than does Canada as a whole. In spite of that I will use the BC statistics as a proxy for Canadian statistics.

I will also perform rudimentary assessments about the value of non-taxable benefits such as indexed retirement pensions and health benefits earned by public sector employees. I am not privy to statistical data on public sector wages and benefits and so will perform some rudimentary present value analysis on the potential value of such benefits.

The point of my analysis will be to highlight the importance of such information to any credible study of tax fairness. It should be pointed out that in spite of the limitations in my methodology, I have attempted understand who ‘working Canadians’ really are.

The Federal Government has not really attempted to address tax fairness for all Canadians. Instead they have targeted tax increases for a single group of Canadians based upon an election promise to 39.5% of the electorate. Presumably they don’t believe the targeted group includes many Liberal voters.


According to BC STATS (Small Business Profile 2016), 18% of working British Columbians work in the public sector.

The second chart breaks out small business employment between employees and the self-employed. It is interesting to note that there are virtually the same number of self-employed British Columbians as there are public sector employees.

It is also important to understand there is almost a one-to-one relationship between small business owners and their employees. In other words most small businesses are very small (most involve 3 or fewer individuals).

Collectively however they represent the single largest group of workers (45%) in the BC economy. I suspect that this is true in Canada as a whole. It should be noted that BC Stats considers a large business as one which employs 50 or more people. By contrast I understand that Statistics Canada defines a large business as having 100 or more employees. As discussed in the preceding section the percentage of self-employed workers in BC (18%) is likely somewhat higher than the percentage for Canada as a whole.

According to a study by the Fraser Institute, the percentage of public sector workers is higher in the rest of Canada. If the estimates in the Fraser Institute study are correct, the difference is significant. All of which makes it even more important to consider the value of untaxed public sector benefits in any balanced study of “tax fairness”.

It is almost always true that the self-employed – and those who work for small businesses with fewer than 10 employees (88% of all businesses in BC) – simply don’t have company pensions or health benefits.

Some of us have Private Health Service Plans (“PHSPs”) that allow us to pay an administrator a fee to enable business owners to fully deduct medical expenses from income for a fee (generally about 10% of the medical expenses claimed). In this way we can circumvent the miserly personal tax credits allowed for the ‘uninsured’.

While having fully-funded (and indexed) health benefits is a “nice to have”, the value of untaxed public sector pensions makes for a massive difference between the compensation levels of those working in or for small business and those working in the public sector.

I’m not an actuary and don’t have access to data which is readily available to the Finance Department regarding public sector pensions. Accordingly I simply did a quick present value analysis in order to determine the value of a monthly pension of $3,000, indexed to inflation. As of yesterday’s date I tried to determine the appropriate discount rate using interest rates for a $100,000 GIC over a 5 year (locked-in) term. I then subtracted the annual inflation rate resulting in an annual interest rate of 1.11%

The present value of a combination of monthly pension and health benefits of $3,000 for a period of 30 years equates to a tax-free benefit at retirement of $916,922.

Then I simply used the built-in Present Value function in Microsoft Excel for a monthly annuity of $3,000 over 30 years. Of course the actual amount of the monthly benefit will vary depending on the contract,  income level and length of service. For example a $4,000 monthly benefit would be worth $1.22 million at retirement. The present value of a combination of monthly pension and health benefits of $3,000 for a period of 30 years equates to a tax-free benefit at retirement of $916,922.

Note that even at a relatively modest level of benefits, this result is probably worth a great deal more than the value of the maximum Lifetime Capital Gains Exemption available to owners of qualified small business corporation shares. I would point out that most small businesses fail. Only a very tiny percentage ever actually realize the full $800,000 (2014 and indexed thereafter) capital gain. By contrast every public sector worker who retires receives a pension based upon their time in.

In light of this it is interesting that the Federal Government chose not to address their excessive generosity to their own employees who take few if any risks and instead wag the finger of unfairness at those in the private sector who happen to be very successful. While I don’t quarrel with the principle that the wealthiest Canadians should pay more in tax and that wealthy professionals aren’t really ‘entrepreneurs’ taking significant risks, it is clear to me that the current direction of the Federal Government regarding “tax fairness” isn’t fair and seems designed to appeal to their base.

In their haste to paint the “wealthy other” as a politically acceptable bogeyman (they vote conservative after all) they have injured a great many innocent bystanders who will be saddled with increased compliance costs as well as increased taxes. They have also ignored another group who collectively are far more numerous and important to the economy and expect the rest of us “to fund public sector pensions at a level that we can only dream about attaining ourselves?” (in Bill Morneau’s own words).

At a 2013 pension conference, Morneau described defined benefit plans, which are on the “path to extinction” in the private sector, as a “public sector problem.”

He questioned their sustainability, which he argued came down to two “stark” choices. Government can continue to fund “rigid” defined benefit plans, creating labour strife and discord between the sectors and generations, or bring flexibility and consider target benefit plans where the risks of lower fund returns or unexpected longevity are shared.

At the same conference, he posed a question that has unsettled some union leaders about his appointment in Finance.
“Who believes that the average Canadian, without a defined benefit plan, and with the demonstrated capacity to save enough to support their retirement, will, over the long term agree to fund public sector pensions at a level that they can only dream about attaining themselves?”


Recognizing that it is often difficult – perhaps impossible – to take away benefits enjoyed by specific  groups without engaging in class warfare, I would suggest that we avoid talking about “loopholes” and instead offer benefits to other groups as a way of addressing some of the inequities in the tax system.


Why not offer income splitting to all Canadians couples, thereby eliminating most of the advantage enjoyed by the self-employed? This is done in many other countries.


Replace the miserly medical expense tax credit system for all Canadians up to the median income level. This will act to level the playing field a little for the self-employed, employees of small businesses and for people on a fixed income.


Eliminate the small business deduction for the incorporated practices of lawyers, doctors and accountants (and engineers?). Leave in place income splitting with spouses – and increase penalties on excessive wages paid to other family members. Eliminate the ability to sprinkle income using multiple classes of shares for these corporations.


Expand the concept of differential rates on active business income where corporations pay all (eg. 50 or more arm’s-length) employees at an average of say 25% (i.e. at a prescribed rate) or more above the median wage of all Canadians.


The concept of Specified Corporate Income complicates the determination of the small business deduction and is simply not workable.

To the extent that these measures result in decreases in total revenue consider increasing the top marginal rates of tax for high income taxpayers.