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Money talks in Canadian politics. This tax reform showdown is just the latest proof

Colin Horgan is a writer and journalist in Toronto and a frequent contributor to Maclean's magazine and the Guardian. From September 2014 to December 2015 he was a speechwriter for Justin Trudeau and the Liberal Party of Canada.

If you were somehow under the impression that money does not talk in Canadian politics, let the latest epic, headline-hogging dust-up over income tax reform disabuse you of that notion. Money matters. And the fight over tax reform shows that the people who have it, by and large, are the people who get heard.

 

Back in July, Finance Minister Bill Morneau announced he would soon implement changes to Canada's income tax structure to close a few loopholes for Canadian-controlled private corporations (CCPC), a specific kind of small business.

 

In short, at the moment, incorporating as a small business helps some wealthy Canadians reduce their overall tax burden. People do this a lot, and they have been choosing to do it more recently. That's been particularly true of doctors. It's also particularly the case in Ontario, where, in its 2005 budget, the government allowed doctors' family members to own shares in their CCPC. This meant they could be paid like employees, and their slice of the money would be subject only to personal income tax. In other words, it incentivized income splitting, or sprinkling – something Morneau also now wants to curtail.

 

After 2005, there was — as university researchers Michael Wolfson and Scott Legree put it in their study at the time — a "dramatic spurt of growth" in the number of physician CCPCs in Ontario: the number rose from roughly 2,000 in 2005, to roughly 16,000 in 2011. By contrast, in British Columbia, the number of physician CCPCs went from approximately 5,000 to just over 6,000 during the same period.

 

Those Ontario CCPCs no doubt contributed significantly to the overall national rise in small private companies. In July, the Department of Finance reported that across Canada, the number of CCPCs rose from 1.2 million in 2001 to 1.8 million in 2014.

 

Importantly, it noted also that "the number of corporations in professional services has tripled over the last 15 years." As economist Kevin Milligan pointed out at Maclean's, this rise in CCPCs has occurred over a time when "the rate of self-employment has barely budged," suggesting that "much of this big shift has been tax-motivated rather than reflecting changes in actual economic activity."

'Two classes of Canadians'

 

In defending his new tax changes, Morneau has suggested that if the status quo were to remain, it might create "two classes of Canadians" in terms of taxation. Whether that is the case, what his changes have already revealed is a different kind of split over money: the divide between the people who can get their grievances to dominate the agenda in Ottawa, and the people who can't.

 

The key to understanding that is to realize that lobbying is at work, in two directions.

 

First: the upward pressure. As part of their work, organizations such as the Canadian Federation of Independent Business (CFIB), the Canadian Medical Association (CMA), and the Ontario Medical Association (OMA) – to name but three – meet with politicians in Ottawa or Toronto and represent the interests of their members. This is all fine and legal, and happens all the time across industries.

 

Small business tax changes

There is a delay of about a month between when lobbyists register their activities and when they become public on the lobbyist registry, and the details of those meetings are always vague (that's allowed), but already there are hints that Morneau's tax changes – first announced in this past spring budget – started a few conversations on the Hill.

 

For instance, the Canadian Medical Association lobbied two key policy advisors, Mike McNair and Tyler Meredith, in the Prime Minister's Office in May about the budget. We don't know specifically what was talked about, but in a summary of the topics the lobbyist lists as having discussed, generally, is "tax planning using private corporations."

 

Similarly, a lobbyist for the Canadian Federation of Independent Business met with Morneau's senior policy adviser, Elliot Hughes, the same day the tax reforms were announced. A few days later, he met withConservative party deputy leader Lisa Raitt to discuss "small business." On the day Morneau announced his changes, Raitt's Twitter feed was silent on the topic; since early August, it has dominated her feed.

 

The role lobbying can play in these kinds of decisions is clear when the 2005 Ontario budget is considered. The changes the Ontario government made then were, as the budget itself stated, because of "recent negotiations with the Ontario Medical Association." As it happens, the OMA registered a lobbyist in Ottawa effective August 2, specifically to discuss a finance department consultation document titled "Tax Planning Using Private Corporations," and to have "discussions regarding the impact these [tax] proposals will have on physicians."

Then, there is the downward pressure exerted, which may be even more important.

Groups like these also spend time and money rallying their professional base. Issue-oriented campaigns might involve anything from advertisements, placed opinion pieces, door-knocking, or just making phone calls to cajole affected individuals into calling their local MP to echo the complaints made in offices around Parliament Hill. Whatever shape a campaign like that takes, it costs a lot of money to sustain it and ensure it has effect.

 

All that money doesn't necessarily mean these changes will be reversed. Morneau has said he is sticking to his guns — at least for now. But it doesn't mean the subject is going to disappear anytime soon. Resources will continue to be thrown in the government's (and opposition's) direction to keep the issue at the forefront of parliamentary debate. It may yet shift the direction of policy.

 

A political showdown

As they gathered in B.C. for their annual caucus meeting, Liberal MPs were reportedly jittery after a summer of taking phone calls about the tax reforms and looking to get some clarity from the finance minister. Even before that, Morneau had already held a conference call to defend his position to his fellow Liberals.

It's possible constituents phoned of their own accord; it's also possible they had a prompt. Either way, those calls matter. MPs get a lot of people calling them about issues, but they are not usually doctors and lawyers.The calls were likely already unexpected in terms of tone and frequency, and they were surely made all the more effective because of who was calling.

What it all means is that the coming rhetorical showdown in Parliament over tax reform for a small number Canadians who are very weathly, or only more wealthy than most, will exist because they – and the organizations that represent them – have the money to make it one. Morneau may have been talking about taxes when he mentioned a societal income divide, but the fact that he has had to discuss this issue at length already shows how, when it comes to special interests, one already exists.

 

Public by CBC News