Finance Minister Bill Morneau delivers the budget in the House of Commons on Parliament Hill, in Ottawa, on Feb. 27, 2018.CHRIS WATTIE/Reuters
Finance officials warned Bill Morneau that planned changes to small-business tax rules would come under attack from “well-financed” lobby groups, but they urged the Finance Minister to proceed in part because polls show taxing the rich is popular with Canadians.
Internal briefing notes reveal the detailed planning that took place behind the scenes in Ottawa last summer as officials prepared the minister for an announcement that would place him on the defensive for months.
The minister’s July 18 release of a paper outlining three proposed tax changes generated a muted response at first, but small-business owners and tax professionals began raising strong concerns in August. The matter then dominated the political agenda when MPs returned to Ottawa in September.
As opposition started to build, documents released through federal access laws show officials mapped out four months’ worth of events for the minister and his team to explain the plan, including taking questions on Facebook, committee appearances and engaging “key journalists.”
“Media coverage has indicated a growing opposition to the Department of Finance’s consultation paper,” states an Aug. 24 communications strategy approved by the department’s deputy minister, Paul Rochon.
The highly redacted document adds that “the Official Opposition has signalled its intent to champion the disgruntlement of small business.”
The August memo struck a far more urgent tone than a similar presentation from Mr. Rochon to the minister in late June, a few weeks before the proposals were made public.
At that time, Mr. Rochon presented the minister with a case for going ahead with the changes, even though they would likely generate controversy.
Government officials were clearly aware that the looming tax announcement would not be an easy sell.
“The government’s challenge will be to explain why the changes are being made,” said one note to the minister in preparation for a June 28 meeting.
That same briefing document noted that, broadly speaking, the government has not had much success when it comes to communicating its overall agenda on financial matters.
“Public opinion research finds that Canadians are not yet perceiving the positive impact of the government’s policies,” Mr. Morneau was told. Government officials suggested that this might be because of limited access to paid advertising. The budget for taxpayer-funded ads has been reduced under the Liberals, in fulfillment of a campaign pledge.
The July proposals included restrictions on the use of incorporated small businesses to “sprinkle” income among family members. That plan was modified slightly and then put in place as of Jan. 1, 2018. Another measure related to the conversion of dividend income into lower-taxed capital gains was abandoned entirely in the fall. A third measure aimed at restricting the use of small businesses for making passive investments was changed significantly in the fall and is currently before Parliament as part of the government’s latest budget bill.
A July 6 memo from the Finance Department to Mr. Morneau said public opinion research has shown that federal measures related to tax fairness are popular with Canadians and that a strong majority believe that “the wealthy were getting away with paying too little in taxes.”
That memo also included lists of “opinion shapers” who were expected to support or oppose the government’s small-business tax plan. The groups expected to support the measures were primarily left-leaning organizations and labour unions. Two individuals were named: economist Armine Yalnizyan and Linda McQuaig, an author and freelance columnist for the Toronto Star who ran as a federal NDP candidate in 2015. The groups identified as likely to “rally public opinion against the government’s efforts,” include the Canadian Federation of Independent Business, the Canadian Bar Association, the Canadian Medical Association, the Canadian Tax Foundation and the Fraser Institute.
Ms. Yalnizyan, who is identified in the documents as a potential supporter of the changes, said the process was flawed and fell short of genuine consultation. She also said that while the measures did respond to concerns she and others have raised for years, they should have been part of a more comprehensive tax-reform package.
“Trying to close tax loopholes is very challenging politically,” she said.
Canadian Federation of Independent Business president Dan Kelly said the documents show the government “dramatically underestimated” the push back from individual business owners and failed to plan for genuine discussion with critics.
“I do feel very strongly that there wouldn’t have needed to be the tax war of 2017 had the government sincerely engaged some of the groups that they knew would have concerns,” he said.
Chloé Luciani-Girouard, a spokesperson for Mr. Morneau, said the fact that the government made major changes to its initial proposals shows the consultation process was genuine.
“We listened to the concerns from the business community,” she said.
The Finance Minister was asked Thursday about legislation in the budget that would give foreign authorities some access to Canadians’ confidential information. Bill Morneau says the measure is aimed at cracking down on tax evasion.
The Canadian Press