Conservatives show poise in vote against Liberal "revenue hogging" tax increase

Why does the HVAC business owner deserve another tax increase?

The deed is done, and Finance Minister Chrystia Freeland got her wish. The capital gains tax inclusion rate increase was passed by a vote of MPs and is now on its way to the Liberal-controlled Senate.

In the wake of the Minister’s minor tweaks to the original Budget announcement, I had the chance to provide some initial reactions to the BNN Bloomberg audience earlier this week. At the time, none of us knew what the Conservative Party was going to do when it came time to vote on the revised proposal. I figured that there were two legitimate options: i) abstain, on the basis that the Liberals were merely playing cynical politics by putting the issue before Parliament via a separate motion, or ii) vote against it, even if that meant that the Conservatives wouldn’t pick up any additional votes that weren’t already in their column. Voting in favour of another tax increase to fund last year’s Liberal waste wasn’t really on the table.

In his Substack column, Paul Wells had this to say:

What Poilievre ended up doing was at once more internally consistent, gutsier, and smarter than what I expected. In voting against the government’s separate tax measure, Poilievre has chosen to fight the Liberals on the ground all of us Bytown swells ignored because it was so obvious: revenue hogging.

What struck me about the Conservative’s counterattack was not that they were against another Liberal/NDP tax increase, but just how considered the response was:

• a tax-reform task force, with farmers, inventors, entrepreneurs and workers recommending changes to the tax code

• a new tax cut that would reduce “the share of taxes paid by the poor and middle class while cutting tax-funded corporate welfare and cracking down on overseas tax havens”

• a reduction in the length of the tax code

• given the Finance Minister’s claim that the increased inclusion rate will only impact 0.13% of Canadians, asking the government to amend their Bill to exempt the owners of small businesses (think plumbing, electrical….) and farmers from the capital gains tax increase

As much as they’ve been reticent to release policy details in advance of the next Federal election — by tying this latest blow to Canada’s overall affordability crisis and the lack of investment capital — the Conservatives turned the Liberal capital gains trap into an advantage. While many have focused on farmers and the traditional generational transfers that take place within farm families, or the Innovation Economy (see prior post “How Freeland’s capital gains tax changes will harm Canada’s economic future” May 1-24), every home owner in Canada deals with someone associated with a series of small businesses that either keep our lights on and our homes warm, among others, or are part of the ecosystem that is essential to get new homes and apartments built.

It would have been so easy for the Grits to agree to the Conservative proposal for what I’ll call the “HVAC Owner Exemption,” and they were silly to have not stolen the idea and made it their own. As with your local Vet and Dentist, the implied value of the HVAC owner’s business is a big chunk of their retirement nest egg. This might have been inconceivable when someone started their business 30 years ago, but these businesses are currently trading for 10-12x EBITDA (it was probably 10-15x two years ago). Depending on how many staff and clients one might have, the sale of that business (to a PE fund, your kids/employees) is likely to be meaningful enough to attract capital gains tax. If that business owner is now paying more tax on that sale than previously, the byproduct is that they now have to work longer to be able to eventually generate the same net amount of capital to retire on.

What might be worse for Prime Minister Justin Trudeau is if that business owner has to spend a bunch of money on accountants to arrange their affairs differently to preserve the status quo, tax-wise, in advance of a potential future transaction — no entrepreneur will be pleased that this government forced them to spend some of today’s free cash flow on fees, in the event there might be a “happy event” down the road. That’s money that could otherwise have gone towards a new truck, training staff, a spousal RRSP, church charity donation, or their unregistered retirement savings account. (Over the coming days, I’ll do some basic excel noodling about the potential impact of this all on your average business owner.)

Minister Freeland is doing her best to try to convince voters that the increased capital gains tax inclusion rate is all that stands between us and a dystopian future:

Do we want to live in a country where those at the very top live lives of luxury but must do so in gated communities behind ever higher fences using private health care and airplanes because the public sphere is so degraded and the wrath of the vast majority of their lesser privileged compatriots burns so hot?

As political tactics go, it’s ludicrous. And galling.

The federal government spends about $500 billion a year on various programs, and the Liberals are trying to guilt business owners and Angel Investors into thinking that they’re what’s holding Canada back. As the late John Honderich liked to say, you can’t make this stuff up.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo: Plumber, New York 1951, by Irving Penn)