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Concern mounts over Morneau’s proposed tax changes affecting small businesses

Finance Minister Bill Morneau holds a press conference at the National Press Theatre in Ottawa, on July 18, 2017.

Sean Kilpatrick/THE CANADIAN PRESS

Small-business lobby groups have been holding briefings across the country to draw attention to federal tax changes they say could be devastating.

Finance Minister Bill Morneau has been forced to take to social media to defend his government's proposals, which are expected to be discussed next week at the Liberal caucus meeting in Kelowna, B.C.

Last week, nearly 300 small-business owners crammed a briefing on the topic in Calgary. Kim Moody, a tax expert with Moodys Gartner who hosted the free seminar at Mount Royal University, said that level of interest is unprecedented.

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"This is by far the biggest response we've ever seen," he said. The accountant presented a 158-page analysis of the changes and said some business owners were furious after learning more about the government's plans.

Small-business lobby groups such as the Canadian Federation of Independent Business and organizations representing doctors have been urging their members to speak out against the changes and write to their MPs.

On July 18, Mr. Morneau released a detailed package of tax changes affecting small businesses. The consultations are open for 75 days, meaning they will be closed two weeks after Parliament resumes on Sept. 18. Many business owners are petitioning the minister to extend the consultations.

Daniel Lauzon, a spokesman for the minister, said the strong negative reaction was expected given the effect the changes will have on high-income earners. However, he said many small businesses are unlikely to be affected at all. He also said the government is standing by its plans but is open to suggestions about how they will be implemented.

Mr. Morneau took to social media this week in defence of his proposals. In a series of Twitter posts on Monday afternoon, Mr. Morneau said the proposals are designed to help businesses grow, rather than allowing business owners to shelter personal income from tax.

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"We're consulting about closing unfair loopholes," Mr. Morneau wrote. "We will not raise taxes on small businesses."

Mr. Moody's firm responded to the minister online, describing his comments as "totally false." Mr. Moody says he takes issue with Mr. Morneau's rhetorical approach, describing it as populist class warfare that shows little interest in genuine consultation.

"If these proposals go through, they will literally have a devastating effect on the small-business [community]," he said. "That's not trying to be hyperbolic. That's just the truth. I already have meetings lined up from now until Christmastime with people who want to deploy their capital outside of Canada."

The proposed changes are highly complex. They relate to the tax treatment of small businesses and fall into three general categories.

The first change involves draft legislation that would restrict the use of income sprinkling as of Jan. 1, 2018. This is a practice in which a business owner in a high income-tax rate can reduce the total amount of tax paid by his or her family by "sprinkling" income to family members in lower tax brackets. The government says this practice would still be allowed if the payments – through dividends or capital gains – were "reasonable" compensation to family members for actual contributions to the business.

Critics question how such a reasonableness test would be applied.

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The second proposal – which has not yet advanced to the stage of draft legislation – would restrict the use of private corporations as a vehicle for making passive investments unrelated to the business.

The government says this is an "unintended" tax advantage that is primarily used by higher-income individuals who have savings that go beyond the annual contribution limits to registered retirement savings plans and tax-free savings accounts.

Business groups counter that passive investments provide a buffer for businesses to get through leaner years.

The third proposed change involves draft legislation that would limit a business owner's ability to convert income into capital gains – rather than as a salary – as a way of paying less tax. The draft legislation states the third set of changes would take effect retroactively as of July 18, 2017.

The package of changes is inspired by the work of several tax-policy academics who have written papers that criticize existing small-business tax rules as a source of unfair advantage.

The Liberal Party's 2015 election platform specifically highlighted the work of University of Ottawa professor Michael Wolfson, a top researcher on income and equality issues. He has referred to small-business rules as the "dark corner of the tax system" that allows couples to split income for tax purposes in ways that are not allowed for families who are not part of a business.

Dr. Wolfson praised the minister's proposals earlier this month.

"No, the sky is not falling on Canada's small businesses," he wrote in The Globe and Mail. "The minister's proposals would clearly increase tax fairness. Indeed, the extra revenues collected from mainly higher-income individuals, by bringing their effective income tax rates more in line with their salaried counterparts, could be used to benefit the poor and those in the middle class."

Video: Morneau says he’ll pay more tax under proposed measures (The Canadian Press)
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About the Author
Parliamentary reporter

A member of the Parliamentary Press Gallery since 1999, Bill Curry worked for The Hill Times and the National Post prior to joining The Globe in Feb. 2005. Originally from North Bay, Ont., Bill reports on a wide range of topics on Parliament Hill, with a focus on finance. More

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