Canadian tech CEO predicts updates to tax plans will be well received

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Canadian tech leaders expect they will like the new approach to passive investing Finance Minister Bill Morneau will unveil in an update of the government's small-business tax plans on Wednesday.

The beleaguered minister will make his second announcement of the week on how the Liberal government will respond to the outpouring of criticism since its small-business tax proposals were released in July.

The Wednesday announcement in New Brunswick will respond to concerns related to the passive-investment provisions of the July package. On Thursday, the government will aim to address criticism that the changes would negatively affect the intergenerational transfers of family businesses. Changes related to concerns from Canada's tech sector in relation to venture capital are scheduled for Friday.

The Globe and Mail reported this week that the government is expected to set a maximum amount for how much passive investing can be conducted inside a small business corporation, such as a company buying shares in another firm, before the proposed new tax regime would apply. The government has said its goal is to ensure that incorporated small businesses are not used to make passive investments unrelated to the company. Business groups have countered that those investments could eventually be related to the business if they are needed during hard times. They also say the investments are an important source of retirement savings.

The government's new proposal is aimed at striking a compromise and making it clearer that the changes are targeted at high-income Canadians.

John Reid, the chief executive of the Canadian Advanced Technology Alliance, said he has received a briefing on the government's revised plan and predicts the changes will be very well received in Canada's tech community. He said this week's changes will ease the controversy the government has faced over the tax proposals.

"Despite the way they've done it, they've actually listened to the specific comments and feedback from the community and have addressed each and every point," he said. "Not that we're not going to disagree with some of the changes that are going to be rolled out, particularly if caps are set for passive income – how you allocate that for retirement or whatever – but I think now we've actually set the stage that we can have more of a fair discussion amongst parties."

Mike Woollatt, CEO of the Canadian Venture Capital and Private Equity Association, has not received a briefing on the new changes, but said he is pleased the government is planning a specific response to concerns from the venture-capital community. Tech investors have said higher taxes on passive investment would mean entrepreneurs have less money to invest in Canadian startup companies.

Mr. Woollatt said he will be watching the details that are unveiled on allowable passive investing, which he added could still be a source of concern if the cap is set too low.

"We've been working very well with them, so we're hoping they heard us loud and clear," he said. "As with all tax policy, there's always unintended consequences."

The government's plan to roll out its announcements throughout the week – the Business Development Bank of Canada's small-business week – got off to a rough start on Monday. Prime Minister Justin Trudeau joined Mr. Morneau for a news conference in Stouffville, Ont., to make a surprise announcement that the Liberals would reduce the small-business tax rate from 10.5 per cent to 9 per cent by 2019.

However, Mr. Trudeau received widespread criticism from political columnists and opposition MPs for initially refusing to allow journalists to ask Mr. Morneau questions, telling reporters they should talk to him first because "you get a chance to talk to the Prime Minister." In addition to managing the tax issue, Mr. Morneau is also on the defensive after The Globe reported that, unlike Mr. Trudeau, he has not placed his personal wealth in a blind trust.

Mr. Morneau has said he followed all of the advice he received from federal Conflict of Interest and Ethics Commissioner Mary Dawson.

During a meeting in late September with The Globe's editorial board, Mr. Morneau said the government's passive-investment changes are aimed at encouraging business owners to put "dead money" sitting in corporate structures back into the Canadian economy.

"We have hundreds of billions of dollars sitting on the sidelines," he said. "The amount that gets parked every year is between $25-billion and $30-billion. … So from my perspective, we've got this increasing tax unfairness, one that's only been there for a relatively short period of time, that's by definition going to grow the inequality between people that can have a Canadian-controlled private corporation and people that can't."