The mechanic, the farmer and the female doctor. These are the people the opposition Conservatives highlight when they complain about the Liberal government's proposed small-business tax changes.
They found that these figures are the Liberal public-relations soft spots. And they're quite right: If average Canadians think the tax changes target those kinds of people, they will oppose them.
As Finance Minister Bill Morneau tries to adjust his proposals to win political support, he'd be smart to think about the mechanic, the farmer and the female doctor. If it's clear those people aren't being unfairly clobbered, most Canadians will likely think they're fair.
Two of the tax proposals are things most Canadians will generally think are fair anyway, at least in principle. One is aimed at stopping people from using corporations to turn income into lower-taxed capital gains. Another is to stop people from using corporate dividends to "sprinkle" income to a spouse or a university-age child in a lower tax bracket – something ordinary salary earners can't do.
But a lot of the questions are about a third proposal, aimed at blocking small-business owners from using corporations to get a tax break on passive income – like returns on an investment portfolio.
Conservative Leader Andrew Scheer kept asking about the mechanic in Question Period last week, to conjure an image of an ordinary Joe owner making a relatively ordinary income while working hard to build a small business. Mr. Scheer complained that the Liberal proposals on passive income could hurt the mechanic's ability to save.
What he didn't say, though, is that most of the passive income the government is talking about isn't earned by middle-income mechanics. According to Finance Canada officials, just 2 per cent of corporations earn 80 per cent of the kind of passive income that might be affected – these tax changes only apply to companies that earn active income from the business and then put it into passive investments. So about 30,000 companies earned $16-billion of that passive income – an average of more than a half million dollars each.
Mechanic Joe, it must be said, isn't in that league: He's not earning a half-mil in interest on his investments in a year. In fact, for the most part, saving money inside a private corporation isn't usually a strategy that works unless you are in the top tax bracket, according to University of British Columbia economist Kevin Milligan.
But there are still lots of business owners who take in smaller sums in passive income. Altogether, about 300,000 companies would be affected – and apart from the 30,000 who earn most of it, the other 270,000 would still have earned $4-billion in 2015.
It's those people, who earn $15,000 or $20,000 a year in passive income, who are the Liberals' political problem. If the government exempted small amounts of passive income from the new measure, no one could suggest it hurts mechanics.
The farmer? Much of the anger aimed at the government comes from fear that the proposals will make it easier to sell a family farm to an outsider than to pass it on to children. That's a by-product of a measure designed to harden anti-evasion rules on transactions between relatives – but if Finance officials can't fix its impact on farmers, the government will have to back down, or suffer damage.
And then there's the female doctor. Many male doctors are mad at the tax changes, too, but politicians know the public feels little sympathy for affluent MDs – except for the women who have complained it will be harder to save for maternity leave.
Those women aren't harder hit by the tax proposal – they are less likely than older men to "sprinkle" income, and Mr. Milligan calculates a female saving $100,000 over three years for a maternity leave would lose one per cent because of the passive-income tax changes. But the whole debate is dangerous for a Liberal Party that claims to support women in the work force, and it has highlighted a challenge female entrepreneurs face: If the Liberals want political support, they'd be wise to propose parental-leave breaks to encourage young female entrepreneurs.
In fact, Mr. Morneau should take the opportunity to combine the elimination of these "loopholes" with measures that really do encourage entrepreneurship, such as accelerated depreciation for capital investments, that help the mechanic and the farmer. Mr. Morneau will need to tailor his proposals to them if he wants to sell his plan.