There is one very good reason why the Liberals could not entertain the request from Canadian doctors for a carveout on the looming capital-gains tax increase, and it comes down, as most things do with this government, to politics and perceptions.
For months now, Finance Minister Chrystia Freeland has insisted that the change to the capital-gains inclusion rate, which is going from 50 per cent to 66.7 per cent for gains above $250,000 for individuals on June 25, will only affect a minuscule number of people: the richest of the rich. Just 0.13 per cent of Canadians. This change is a way to deliver on the government’s promise of tax fairness, Ms. Freeland has repeated over and over again. And she has been firm in assuring the public that it won’t affect the vast, vast majority of Canadians.
The change does affect the more than half of Canadian doctors who are incorporated, however, since the $250,000 threshold would not apply to them. That means all of their gains will be subject to the higher inclusion rate (depending on their specific circumstances, they may be able to lower their tax burden through, for example, the new Canada Entrepreneurs’ Incentive and/or higher Lifetime Capital Gains Exemption threshold). Back in May, the Canadian Medical Association (CMA), along with provincial and territorial medical associations, sent a letter to the federal government requesting either an exemption for medical professional corporations of the higher inclusion rate, or a similar $250,000 carveout for incorporated physicians. The CMA warned that failure to do so would “add undue pressure and financial strain” to physicians, “undermining the stability of our health care system.”
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But the government couldn’t yield to that request; not after weeks and weeks of claiming that their carefully considered change to the inclusion rate would only affect Canada’s top 0.13 per cent – the yacht traders and private-jet owners, surely – who generally don’t include family doctors. To pivot now would be to undermine their own message, and what is more important to this government than staying on message?
That’s a rhetorical question, though the actual answer should be: doing everything possible to retain and attract doctors, especially since more than 20 per cent of Canadians don’t have a family physician, and the shortage is poised to get much, much worse.
Medical corporations are unlike other small businesses in that their fees are set and paid by the government; Ontario doesn’t tell a plumber how much he can charge to fix a drain, but it does set the cost for administering a vaccine, for example. Doctors have been encouraged to incorporate over the past several decades by provincial governments in lieu of fee increases, and as a means to save for retirement, which is why many doctors, especially those close to retirement, feel they’re being subject to a bait-and-switch. And it’s not the first time; in 2017, this government announced it was putting an end to what it called “income sprinkling”: a practice used by some business owners, including doctors, to “sprinkle” their income to family members to lower their overall tax burden. Then-finance minister Bill Morneau said the measure was a way to ensure the “wealthiest Canadians pay their fair share.” Ms. Freeland has adopted that same language now.
Earlier this week, after she tabled a ways and means motion to introduce the change, Ms. Freeland suggested that provincial governments could use the additional revenue from the inclusion rate hike to increase fees for doctors. In practice, that would mean collecting additional taxes from doctors’ retirement savings to give money back to doctors, which is an awfully cumbersome way to raise service fees. It’s also unsustainable: Though the budget predicted a $6.9-billion windfall in revenue the first year of the rate hike (likely from Canadians selling off their assets before June 25), it falls off precipitously by 2026-27, when the government predicts it will take in just $375-million in additional revenue.
Perhaps the government has judged that few Canadians will feel sympathy for doctors and their suddenly higher capital-gains tax burden. Physicians earn a good living, after all. But effectively penalizing them for setting up corporations at the impetus of their provincial governments is both unfair to them, and counterproductive for a country that is grappling with a health care crisis. Indeed, we want to give doctors, especially family doctors, every incentive to come here, stay here, and for prospective doctors to study here. This change alone won’t drive them out, but a confluence of factors will.
Last weekend, Ms. Freeland, in a bizarre monologue, described a dystopian type of Canada filled with pregnant teens and hungry kids that would result from a failure to raise the inclusion rate on capital gains. While I applaud her for her creativity, there was a much more plausible picture she could have painted: one where an overworked family physician – whose overhead keeps rising and whose fees haven’t kept up with inflation – is given one more reason to pack up her practice and move elsewhere. That scenario is much easier to imagine.