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Politics Unless they can win over ordinary citizens, Ottawa’s proposed tax changes will sting

It's the classic case of the angry few outweighing the ambivalent many.

Tax changes proposed by Finance Minister Bill Morneau have riled up small-business owners who think they'll lose money. And Mr. Morneau's problem is that even if there are 20 times as many people who would judge it to be fair, they'll probably never give it a second thought, let alone cast their vote to support it.

The tax changes are supposed to be a kind of companion piece to the soak-the-rich pitch that Justin Trudeau's Liberals made during the 2015 election campaign, when they promised to tax the top 1 per cent of income earners to pay for a middle-class tax cut. It was popular: Polls showed a lot of Canadian thought it sounded fair.

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Many of those same people might think Mr. Morneau's current plan for small-business taxes – intended to stop people from using corporations to pay less personal tax – sounds fair, too, if they turned their minds to it. But chances are, they won't. Most don't spend their time worrying about doctors using corporations for income-splitting – and this time, there's no middle-class tax cut to get their attention.

It's a policy that seems likely to make motivated enemies, but no friends. And unless the Finance Minister can make ordinary Canadians feel strongly that he's fixing an unfair system, he's going to take a beating.

Mr. Morneau has pointed to the 50-per-cent increase in the number of privately held corporations over the past 15 years to argue that they are being used by individuals as a means to pay lower personal taxes. He is proposing to block some of those avenues, such as using corporations for income-splitting or income-sprinkling by diverting some of one's income to a spouse or adult kids, or keeping a "passive" investment portfolio, like stocks and bonds, inside a corporation to reduce taxes.

Small-business groups such as the Canadian Federation of Independent Business are treating it like an attack.

They have a couple of different kinds of complaints. There are the technical complaints that the details of the government's plans will not work as intended and hit people for things that aren't just tax manoeuvring. Then there's the complaint that it's going to cost some small-business owners a chunk of money.

University of British Columbia economist Kevin Milligan argues the two things should be separate. The technical details of the complex government measures have to work to do what's intended, he said – but the goal, of making sure that folks face comparable tax treatment whether or not they have a corporation, is a good one. And he's right. You can argue taxes should be lower, or changed to encourage more retirement savings, or something else, but not that people with corporations should pay less.

Mr. Milligan said that Mr. Morneau's proposals would affect relatively high-income earners. The tax advantages of an investment portfolio within a corporation only kick in with hundreds of thousands of dollars and income-sprinkling won't generate much net benefit until one earns perhaps $150,000 or $200,000. In Canada, that's not far from the 1 per cent.

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On the other hand, there could be millions of Canadians who think Mr. Morneau's idea is fair – it's hard to say, because there hasn't been much polling on the specific question, but several polls indicate Canadians think the top 1 per cent of income earners are skipping out on their fair share of taxes and think they should pay more. It's just that most of those people aren't likely to see this as an important issue.

Greg Lyle, a pollster and strategist who owns Innovative Research Group, noted that the average person hasn't spent much time thinking about doctors' income-splitting, so it's hard to get them fired up now. They're not likely to pay much attention to the issue. And unlike the 2015 tax on the 1 per cent, there's no middle-class tax cut that makes ordinary folks feel affected.

Instead, Mr. Lyle notes, there will be a lot of angry small-business owners. Neither Finance Canada nor the CFIB offered a number of how many will be seriously affected. But Mr. Lyle argues that even a relatively small number can affect donations to the Liberal Party and could cost key ridings to a party that won a 15-seat majority in 2015. "If they're fighting mad and they go from being passive Liberals to passionate Tories, that could mean a lot," he said.

Editor’s note: An earlier version of this story incorrectly said the Liberals won a 16-seat majority in 2015. In fact, it was 15.
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