Bill Morneau – Crooked or Just Confused?
Authors: Rob Carlson and Adrian Nagy
Over the course of the summer, tax professionals across Canada were scratching their heads wondering about the intent of the Liberals Small Business Tax Changes.
On numerous occasions, questions were posed to Department of Finance to clarify the true intent of these proposals.
Simply put, the stated purpose of these proposals did not agree to what was presented in the draft proposals. Clearly, there were much simpler and less disruptive ways of achieving the Liberals stated goals.
Recently, The Globe and Mail reported that Mr. Morneau told its editorial board the ultimate goal of measures to discourage small-business corporations from holding passive investments was to liberate “billions” of dollars in “dead money” that could be invested productively in their operations or in other direct business investment that would boost economic growth.
While it is interesting that Mr. Morneau waited months to come forward with his “ultimate goal”, once again the stated purpose does not make sense.
As most of you are aware, most of your passive investments are in stocks and bonds. In other words, your passive investments are already in the market.
Because the stated goals of these tax changes did not make sense, tax professionals started to look at the “winners” and “losers” from these changes with the hope of determining the true goal.
Much has been written about the “losers” – small business owners, farmers, fishermen, and professionals.
But who are the “winners”?
The big “winners” are public companies (the changes do not apply to public companies only private companies) and benefit companies that offer solutions that mitigate the effects of these proposed tax changes.
It might surprise some of you to know that the largest publicly traded benefits consulting company in Canada is none other than Morneau Shepell (http://www.morneaushepell.com/ca-en), Morneau Shepell was founded in 1966 by Frank Morneau, the father of the current Canadian Finance Minister, Bill Morneau. Bill Morneau, owns approximately 27% of the shares of Morneau Shepell, a holding worth approximately $47 million dollars. Lest we forget, this is the same Monreau Shepell, and Bill Morneau, that appear in the Panama Papers (https://offshoreleaks.icij.org/nodes/20170256).
In order for you to understand how Bill Morneau “won”, we need to explain the Bill Morneau conspiracy theory.
Bill Morneau conspiracy theory
Imagine for a moment that you are the former head of Canada’s largest public benefit consulting company, and you want to change Canada’s Tax Act to help your business.
Currently in Canada, pensions and benefits are only provided in large private companies with unions, or in public companies. You sell very few pension and benefits products to small businesses. Small businesses comprise the lion’s share of all Canadian businesses.
You currently offer a product called an Individual Pension Plan (IPP) which is similar to a RRSP. But to be eligible for an IPP, you need to receive pension-eligible T-4 employment income. Self-employment income, partnership income and dividend income are not pension-eligible. Most small businesses in Canada pay dividends and not wages. In addition, IPP’s have ongoing costs, and annual limits (which are typically higher than RRSP’s).
Because of these issues, under Canada’s current tax structure, small business owners would prefer to hold passive investments in their businesses and not deal with the costs and limits of IPP’s.
But wait, you are the Minister of Finance.
What if, you make it very difficult and complex for small businesses to pay dividends.
What if, you double tax capital gains as well. Everyone would be forced to take out their money by way of wages, which are pension eligible.
Then all you would need to do is prevent people from holding passive investments in private corporations, so how about I force people to pay 73% tax on their investment income.
Whallah. IPP’s become one of the few products that mitigate the tax damages from my small business changes. Every small business owner will need an IPP, and you are the major player in that market.
It is up to you how much of this conspiracy theory you want to believe.
Did Bill Morneau purposely propose change to the Canadian Income Tax Act, so he could access your “dead money” for his personal benefit? We can’t say.
What we can say, is that the proposed changes clearly present a conflict of interest to Mr. Morneau. A conflict that we would expect the former head of Canada’s largest benefits company to be well aware of. At a minimum he should have excused himself from any discussions that placed him in a conflicted position.
For the most part, Morneau has not directly responded to questions in the House of Commons about the conflict of interest related to his proposed tax changes and the benefit conferred on his family’s company.
He did reply to one by saying: “Not only did I not abstain, but I actively engaged in working to make sure the tax system is fair.”