Lawyers unhappy with CBA over tax stance

The Canadian Bar Association’s decision to join with other small business groups in protesting the federal government’s planned changes to private incorporation tax rules has some lawyers revoking their membership in protest, saying that it’s not something they should be fighting against. “I don’t feel like I was adequately consulted before they took this position,” says Chris Rudnicki, partner with Rusonik O’Connor Robbins Ross Gorham & Angelini LLP in Toronto.

Lawyers unhappy with CBA over tax stance
Chris Rudnicki says he’s cancelled his CBA membership over its protest to changes planned for personal incorporation tax rules. Photo: Robin Kuniski

The Canadian Bar Association’s decision to join with other small business groups in protesting the federal government’s planned changes to private incorporation tax rules has some lawyers revoking their membership in protest, saying that it’s not something they should be fighting against.

“I don’t feel like I was adequately consulted before they took this position,” says Chris Rudnicki, partner with Rusonik O’Connor Robbins Ross Gorham & Angelini LLP in Toronto.

Rudnicki says he has a considered opinion on the issue of the proposed changes, and he was taken aback that his association would have taken a position without getting feedback.

“Lawyers are a tremendously privileged section of our society,” he says.

“We make some of the highest incomes of any profession, especially the kinds of lawyers who tend to be in charge of our national organizations like the CBA.”

The proposed changes announced by the federal government in July affect Canadian Controlled Private Corporations and are intended to: end the practice of “income sprinkling,” where dividends are paid to adult children or other family members at a significant tax advantage; address passive income by removing the tax advantage for using a private corporation for investment purposes; and clamp down on transforming dividend income into capital gains, which are more lightly taxed.

The stated intention from the government is to restore the neutrality between saving inside of a corporation and outside of one.

“The idea of ensuring that our system works, that we don’t create tax advantages for the wealthiest, is important,” federal Finance Minister Bill Morneau told reporters from the cabinet retreat in St. John’s on Sept. 12.

Morneau says that as they hear feedback during the consultation period, they will consider how to best implement what they consider to be important measures.

Rudnicki says that as a third-year lawyer, he doesn’t make nearly that much, but he still feels that lawyers need to use their privileged position to speak out in favour of redistribution and ensuring that those who make more pay their fair share.

“That’s why I decided to cancel my membership,” says Rudnicki. “[I]f you’re going to take a position that is entirely contrary to the spirit of public service that lawyers should have, then I’m done with you as an organization.”

Rudnicki says he has heard from other lawyers who support his position and that some progressive organizations such as the Law Union of Ontario have been critical of the CBA for taking the position.

He adds that for criminal lawyers like him, legal aid subsidized by the government helps practices like his.

The CBA says it took the position because it is part of the Coalition for Small Business Tax Fairness.

“We joined because the changes that were proposed have a negative impact on the ability of all independent businesses, professionals and other small businesses to survive during challenging economic times,” says Ray Adlington, vice president of the CBA.

He says he feels the changes will negatively impact the ability of small businesses to finance growth, innovation and job creation, as well as increase  the compliance costs for those businesses.

He adds that he doesn’t feel the 75-day consultation period, largely over the summer, is adequate for such a large change to tax policy.

Adlington says he hasn’t heard any negative feedback to date on the CBA’s involvement in the Small Business Coalition, but he admits he hasn’t asked.

This isn’t the first time the CBA has found itself offside with its members. In 2014, it planned to act as an intervener in the Supreme Court of Canada case Chevron Corp. v. Yaiguage 2015 SCC 42, but it ended up dropping its plans after a swath of resignations.

“Whenever there’s any sort of issue that comes up, there’s always going to be in any association people that are for and against — that’s just the way it goes,” says Adlington.

“I don’t think this one is going to be as divisive as the Chevron situation was.”

The CBA later told Law Times that it had received positive response from members for joining the coalition and that 90 per cent of feedback from members have expressed their opposition to the government’s proposed changes.

They also stated that hundreds of members have sent letters to their MPs against the measures.

Other lawyers who represent small business interests aren’t buying the position of the Small Business Coalition — or the Canadian Federation of Independent Business — which has spearheaded the initiative.

Grant Buchan-Terrell, a small business lawyer with gbtlaw in Oakville, Ont., says that the professional incorporation rules for lawyers make most of these proposed changes a moot point.

“Lawyers, as a group — which is what I thought the CBA was supposed to represent — can’t use most of the sprinkling and retained earning provisions that are subject to the proposed tax changes, so I find their position curious,” says Buchan-Terrell.

He says that, for the past 10 years, he has done the corporate aspect of tax plans, which are legitimate and legal, that create family trusts for the purposes of income sprinkling and convert dividends to capital gains, but he notes that he is not a tax-planning lawyer and tends to act on the instruction of a Certified Professional Accountant or tax-planning lawyers.

“I’ve made maybe up to 20 per cent of my gross billings in a given year from the commercial law aspects of these very plans,” says Buchan-Terrell.

“It’s not a moral issue, but as a citizen and a business lawyer who understands this, the rhetoric and misrepresentations that are going on against [the proposed changes] are just nonsense.”

Buchan-Terrell says many private corporations and family trusts that have set up with the help of a CPA or tax lawyer have never been used because the person simply doesn’t make enough money to see any benefit from them.

He says that while the nominal level to see any tax benefit would be $150,000 per year, practically speaking, a person would need to make $500,000 per year to make it worthwhile.

“If you can ever get a true quote from somebody in the legal or accounting profession, they will admit that of course [these rules are] a loophole, and it was never intended to use family trusts in this way,” says Buchan-Terrell.

He says that, while he doesn’t plan on cancelling his CBA membership, he nevertheless questions the value of the organization outside of those members who are looking to improve their resumé in advance of a judicial appointment application.

Eugene Meehan, partner with Supreme Advocacy LLP in Ottawa, who was national president of the CBA in 2000, says that every representative organization carries a deep need to consult internally before taking public positions, and he wonders whether this was done with the proposed tax changes.

“This association is mandated to be a non-political body representing lawyers in Canada,” Meehan says. “Engaging in politics is by definition not its job.”       

 

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