Trudeau's Tax Plan Faces Resistance From Canadian Businesses

By Paul Vieira Features Dow Jones Newswires

As the Trump administration aims to cut taxes for businesses, Canadian Prime Minister Justin Trudeau is taking a starkly different tack by cracking down on loopholes for business it says the wealthy exploit to reduce their tax bill.

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Mr. Trudeau, like Mr. Trump, says his push is aimed at helping the middle class. But in a rare and heated backlash against the popular Mr. Trudeau, doctors, financial planners, farmers and small-business owners have united to argue the measures would hurt some of the very middle class the government purports to help.

They have written to lawmakers and directed pointed questions and statements to Finance Minister Bill Morneau at town halls with one message in mind: We're not the rich you are after.

The uproar has been so intense it has forced Messrs. Trudeau and Morneau to backpedal somewhat in a series of moves in recent days.

The proposals were unveiled in July and target nearly two million small to midsize firms and the self-employed that structure their businesses in private corporations. The proposals aim to crack down on unintended advantages gained by incorporating a business, such as the distribution of business dividends to family members to reduce tax. They would also change tax treatment of profits not paid out in dividends.

There has been a surge in the number of Canadian-controlled private corporations formed over the past 15 years, the government has said, adding it is partly due to the structures' tax advantages.

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The government doesn't want to "protect the interests of a privileged few," Mr. Trudeau said last week, explaining the proposals in suburban Toronto.

But people like Alexander Kluev, a 48-year-old who owns a small technology business and whose annual income can vary from 200,000 to as low as 70,000 Canadian dollars, or about $158,000 to $56,000, are angered to be considered a part of the Canadian elite.

"I have the same lifestyle, same house and same car as the same people they deem middle class," Mr. Kluev said. "Fairness here is elusive."

Most business owners in Canada, such as like Mr. Kluev, "aren't the wolf of Wall Street," said Darrell Bricker, chief executive of polling firm Ipsos Public Affairs. "The cleavages that make [that narrative] work in the U.S. don't really exist here to the same extent."

Even the very wealthy here don't earn as much as those in the U.S. The minimum level of income to be considered part of Canada's top 1% of wage earners was C$225,100 in 2014 -- or roughly a quarter of the cost of an average-priced detached home in Toronto, Canada's largest city. By comparison, in the U.S., research from U.C. Berkeley economist Emmanuel Saez suggests the top 1% of earners had minimum of income of around US$443,000.

Instead of targeting businesses, President Donald Trump's tax outline skews the benefits toward upper-income households through the repeal of the estate tax, the elimination of the alternative minimum tax and corporate-tax cuts that most analysts say would benefit owners rather than a company's workers. The top rate on individuals, as contemplated, could drop to 35% from 39.6%.

In the event the Trump tax plan gets implemented, "Canada will be distinctly offside, especially when it comes to retaining entrepreneurs, " Jack Mintz, head of the University of Calgary's public-policy school and a prominent Canadian tax expert, said in a recent piece for the National Post newspaper.

There has been a political cost for Mr. Trudeau, as support for his government has softened amid the tax debate, from a recent high of 43% in April to 35% as of mid-October, according to polling done by Ottawa-based Nanos Research.

Canadians are approaching the prime minister's two-year anniversary in power "with a far less enthusiastic, even jaundiced eye on Mr. Trudeau and his government," said Shachi Kurl, head of the Angus Reid Institute, a polling organization whose data also suggest a drop in Mr. Trudeau's appeal.

Over the past week, Mr. Trudeau and his cabinet ministers rolled out announcements to ensure the proposed changes only target what they describe as the top tier of income earners. Some of the details regarding their fine tuning were sparse. Chief among the carrots the Liberal government is offering is a corporate-tax cut for small firms on the initial C$500,000 of business income earned.

Mr. Morneau -- whose own personal wealth has come under heavy scrunity during the tax-change debate -- reiterated the government's commitment to cracking down on the loopholes.

"We are not going to rethink our objectives, [which are] creating a system that creates opportunities for all and doesn't create advantages just for a few," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 22, 2017 07:14 ET (11:14 GMT)