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The Globe and Mail

Provinces reject federal government's small-business tax changes

Nova Scotia’s Liberal Premier Stephen McNeil, who met with federal Finance Minister Bill Morneau on Friday, expressed concern the changes could hurt his province’s efforts to recruit physicians and make it harder for small businesses to create financial cushions.


Provincial premiers are adding their voices to the furious reaction against the federal government's controversial tax changes to small business rules, and B.C.'s Finance Minister says she believes the pressure will lead to more consultations and a possible reversal.

That pressure included suggestions from provincial leaders of all stripes – Liberals, New Democrats and Conservatives – that the changes will hurt many businesses.

Manitoba Premier Brian Pallister, flanked by business owners and a farmer at a news conference on Friday, called the changes "class warfare." Nova Scotia's Liberal Premier Stephen McNeil, who met with federal Finance Minister Bill Morneau on Friday, expressed concern the changes could hurt his province's efforts to recruit physicians and make it harder for small businesses to create financial cushions.

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Newfoundland and Labrador Premier Dwight Ball, a Liberal, also said he thinks the tax changes will hurt his province.

B.C. Finance Minister Carole James told a business audience at the Vancouver Board of Trade that if the intention was to close loopholes, the legislation does not accomplish that, and she suggested changes are inevitable because consultations were inadequate.

"I certainly believe in closing tax loopholes. I believe that's important, but I also believe there wasn't good consultation done," Ms. James, who is also the province's Deputy Premier, said during a question-and-answer session with members.

"I believe you'll see a shift. Certainly the rumour that is out there is that you'll see some kind of shift coming forward."

Later, she told reporters she has no inside knowledge of upcoming changes, but said she has heard from people that the amount of pressure the federal government is getting and the fact that the consultations have been criticized as too short means some adjustments are inevitable.

Mr. Morneau announced the proposed reforms on July 18, and the 75-day formal consultation period closes on Oct. 2.

The changes relate to incorporated small businesses known as Canadian-controlled private corporations. They would restrict the ability of a business owner to "sprinkle" income to family members as a way of paying less overall tax unless they can prove the payments are reasonable compensation for actual work. Another change would restrict the use of a corporation as a vehicle for making passive investments unrelated to the business. A third change aims at preventing the conversion of income into capital gains as a way of paying less tax.

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Business groups and accountants warn the measures will discourage entrepreneurship and could drive businesses and professionals such as doctors out of the country.

Mr. Pallister, a Conservative, said the changes could damage thousands of small and medium-sized businesses and their employees.

"There is no room here for class warfare. The communications department in Ottawa have chosen to use language like 'loopholes, tax evasion' – recriminatory and accusation language that has no place in this discussion," Mr. Pallister said.

"These proposed changes will take millions of dollars out of the hands of Manitobans and deliver them straight to Ottawa."

On Friday, before his meeting with Mr. McNeil, Mr. Morneau said "some pretty obvious misinformation" was circulating about the effects of the proposals.

"Our objective here is to deal with wealthy people that are incorporating in order to find themselves at a lower tax rate than middle-class Canadians," Mr. Morneau said.

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"Our goal, of course, is [a] long-term, fair tax system that provides a basis for people to invest, to make our country successful."

He added that, for example, only business owners who have annual incomes of at least $150,000 can really benefit from the passive-income incentive.

Ms. James told reporters after her presentation that she has no idea how Ottawa may alter the proposed changes.

"But I think there have been enough issues raised, real, genuine concerns coming from small businesses about the impact this will have that I would be surprised if you didn't see the federal government, at least take a look at making some changes."

Asked what the B.C. New Democrats will do if the federal government doesn't change its approach, Ms. James said that, in that case, the province would engage in further discussions with small businesses.

"More consultation needs to occur. I hope that happens."

With a report from The Canadian Press

Finance Minister Bill Morneau says there is misinformation circulating about the likely impacts of Ottawa’s tax reform plans. The proposed changes have drawn criticism from those who use incorporation to reduce their tax burden. The Canadian Press
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