The Canadian Bar Association made headlines this fall for joining other organizations to oppose the federal government’s proposed tax changes for private corporations.
The Canadian Bar Association made headlines this fall for joining other organizations to oppose the federal government’s proposed tax changes for private corporations.
This summer, the federal government announced a three-pronged plan, which it argued would bring more fairness to the Income Tax Act.
The changes included restricting the ability of business owners to sprinkle income with family members and ending the practice of transforming dividend income into capital gains.
The government was also exploring whether to close a loophole that allows business owners to pay lower taxes on passive investment income held in a corporation.
The CBA united with dozens of other business groups in the Coalition for Small Business Tax Fairness to call on the government to drop the proposals and to hold a longer consultation.
Some lawyers were critical of the CBA’s decision to jump into the debate before consulting widely with its own membership.
More than 175 lawyers signed a petition supporting the proposed tax reforms.
The petition questioned why the CBA was using its resources to “act as a tax lobby group” and some lawyers even revoked their CBA memberships in protest of the association’s stance.
They argued that the proposals did not target lawyers and that they would only affect a small proportion of practitioners, who are equity partners or sole proprietors.
“The CBA does not speak for us,” the petition said.
But others have said the CBA had to make a swift decision because of the short consultation period to provide feedback on the proposed changes.
The government unveiled the proposals on July 18 and the consultation period ran until Oct. 2.
The Coalition for Small Business Tax Fairness, and by extension the CBA, argued that the proposals unfairly targeted small businesses.
Lawyers argued the proposals would have had negative effects on firms.
Jed Chinneck, a London, Ont.-based lawyer, says he worked hard since he opened his practice in 1981 to create a financial cushion for his firm to make it through economic downturns.
“Having a bit of financial fat in your organization is crucial for survival when things turn off,” he says.
He says that the proposals would have meant that money he had put into his firm for his own pension would have been taxed in a significant way.
Chinneck adds that the timing of the government’s announcement in the summer was also problematic.
“That’s right in the middle of a time when most Canadians aren’t thinking about politics,” he says.
Tax lawyers argued that the proposed changes would also cause double taxation for corporate clients.
Finance Minister Bill Morneau has since walked back some of the proposals, including the one concerning capital gains.
But some tax lawyers say the reforms still on the table could negatively affect lawyers.
Marion Howard, a tax lawyer based in Campbellville, Ont., says that the original proposals could have exposed lawyers to negligence lawsuits.
This is because the proposed changes would have made it prohibitive to incorporate and lawyers who do not have tax expertise would have been advising clients to incorporate to protect themselves legally, Howard says.
“They would be going along merrily doing their job and then walking themselves into negligence lawsuits because the tax issues made it prohibitive from a tax point of view to incorporate,” she says.
While Morneau’s recent pronouncements soften this a little bit, it is still possible lawyers would find themselves opened up to negligence claims with the remaining changes, she adds.
She says as a tax lawyer she would not advise to incorporate as it is not clear what Morneau is going to do with passive investment rules.
But a general practitioner when asked the same question would likely tell clients they should incorporate to protect themselves from legal liability.
“They would be out there, doing the best job they could appropriately from a legal point of view, but they wouldn’t know the tax issues,” she says.
“And they shouldn’t [and] they can’t. That’s not their expertise. It’s way too complicated.”
Katya Hodge, a CBA spokeswoman, said the CBA still thinks further consultation is needed despite Morneau’s pledge not to implement some of the proposals.
“Given the complexity of the proposed tax changes, we still believe that more consultation is needed to fully understand the consequences of the proposal. We continue to work with the government,” she said in an emailed statement.
