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Federal Finance Minister Bill Morneau recently released a long-and-nervously-awaited discussion paper that was met with near apoplexy in some corners. That reaction is misguided.

The paper is aimed at closing a number of loopholes where mainly rich taxpayers use private companies (Canadian-controlled private corporations or CCPCs) to reduce their taxes, compared to most Canadians whose incomes come through paycheques or self-employment.

The proposals would fulfil a 2015 Liberal campaign promise to address unfair uses of some arcane provisions of Canada’s Income Tax Act.

But one tax practitioner said in a popular newsletter that “Morneau just announced the Trudeau government’s plan to destroy tax planning as we know it.”

The minister has given the public 75 days to respond.

So far, most of the comments have been rather general. One is that these provisions will hurt the middle class much more than the rich. This is clearly false, as shown in a study I published with my colleagues last year. For the bottom 50 percent of income tax filers in 2011, those with incomes under $51,600, well under 10 percent had a non-trivial interest in a private company. But for the top one percent with incomes over $163,300, more than 50 percent had a significant interest in a private company – and for the top 0.01 percent with incomes over $2.3 million, this figure jumps to almost 80 percent.

Further – as I showed in a study published just before the 2015 election and cited in debates at the time between then-candidate Justin Trudeau and Prime Minister Stephen Harper – federal and provincial governments were forgoing at least half a billion dollars every year in income tax revenues from the use of these private companies for income splitting.

Among those likely to be affected by the minister’s proposals are higher income doctors, some of whom have even threatened to flee the country if these loopholes are tightened.

Before the Ontario budget in 2005, doctors’ spouses could not be shareholders in a private company set up to receive the doctor’s income. But as part of the fee negotiations at that time, the government of Ontario made a very obscure change to their corporate law allowing these spouses to become shareholders. This change was clearly a back-door way to increase the incomes of doctors and their families without most of the public noticing. The number of private doctor companies in Ontario, which had been rising slowly up to 2004 at under 1,500, climbed steeply after this budget to over 16,000 in 2011 – more than a 10-fold increase – and, according to the Ontario Medical Association, to over 20,000 today.

Obviously, this obscure change must have provided substantial benefits for so many doctors to incur the costs of setting up private companies.

If Ontario wants to help doctors maintain their after-tax incomes, they could always support the federal government in closing these loopholes and then use their own resulting increased tax revenues to raise their payments explicitly, through the front door, rather than hiding these very real benefits via obscure back-door tax breaks.

More broadly, many in the business community and some leading economists tout the major benefits of cutting corporate income taxes to improve economic growth.

But there’s a very revealing graph in the minister’s discussion paper. It shows that the taxable incomes of mainly larger public companies, even with all the major corporate income tax cuts since 2000, were quite stable as a percentage of gross domestic product (GDP) from 2002 to 2014. Over this same period, the percentage shares of GDP for the incomes of the self-employed fell by about one-quarter. In contrast, the most dramatic growth was for small private corporations, the ones able to exploit the income-splitting loopholes; their incomes more than doubled as a share of GDP.

Was the decline in incomes of the self-employed, while the incomes in private companies nearly doubled, nothing more than an increasing number of well-advised higher income individuals learning to exploit tax loopholes? We can’t tell with the available data. But we could know if the government followed the auditor general’s spring 2015 recommendations to be much more open and fulsome in their public reporting on these kinds of tax provisions.

So no, the sky is not falling on Canada’s small businesses. The minister’s proposals would clearly increase tax fairness. Indeed, the extra revenues collected from mainly higher-income individuals, by bringing their effective income tax rates more in line with their salaried counterparts, could be used to benefit the poor and those in the middle class.

Michael Wolfson is a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa. He was a Canada Research Chair at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada and has a PhD in economics from Cambridge.

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