Federal budget to include small-business tax details

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Finance Minister Bill Morneau will release his latest plan for small business tax changes Tuesday in a budget that is expected to be light on big new spending.

After back-to-back budgets that announced billions for infrastructure and social programs over the next decade, the Liberal government is signalling that its third budget will focus on just a few targeted areas.

Government officials say measures to support scientific research and boost the participation of women in the work force will be the two key themes of Tuesday's budget. But many small-business owners will be watching closely to see how the Finance Minister responds to their concerns over the government's controversial tax changes.

A government official confirmed to The Globe and Mail on Monday that the budget will include long-awaited details on the government's tax treatment of passive investments held by incorporated small businesses.

While the official declined to discuss specifics, one tax expert who has met with Finance Canada officials said he expects the government will announce further changes to its approach.

"I believe they've listened," said Len Farber, a former head of Finance Canada's tax policy branch, who has been among the many critics of Mr. Morneau's original proposals last summer.

At the time, Mr. Morneau announced a package of proposed changes to the tax rules governing incorporated small businesses. In October, he shelved parts of the plan while other aspects went ahead as of Jan. 1. The last remaining details will be announced in the budget and are related to the taxation of passive investments – such as stocks – that are held inside a corporation.

Mr. Farber said that based on his conversations with officials, he expects the government will simplify its approach. He said a likely option would be to deny the lower small-business tax rate to firms with passive investments that are above a specific threshold. The government has previously indicated that it wants to restrict any changes to companies with more than $1-million in savings.

"I think what they're going to do is possibly constrain access to the small-business deduction," he said. "That to me would make sense and that's what I think a lot of people have been talking to them about. So I expect a bit of a different proposal."

Mr. Morneau's pledge to keep the federal debt on a declining path relative to the economy means the government has little new room to spend beyond the small group of priorities that have already been signalled.

Private-sector economists are urging the minister to limit new budget spending so that Ottawa is able to respond if necessary to economic shocks, such as the potential collapse of the North American free-trade agreement.

The government's fall update projected a $19.9-billion deficit this year. The size of the annual deficit was projected to decline to $12.5-billion by 2022-2023.

Mr. Morneau has yet to announce a target date for erasing the deficit, even though the Liberal Party's 2015 election platform promised to keep annual deficits under $10-billion and balance the books by 2019.

Randall Bartlett, chief economist with the University of Ottawa's Institute of Fiscal Studies and Democracy, said he's skeptical that the Finance Minister will be able to meet his longer term fiscal targets given that they are based on a sharp change in spending trends.

The government's fall fiscal update signalled that the growth rate of new direct program spending would be kept under 2 per cent for the next four years.

"I'm not expecting any major new spending," Mr. Bartlett said.

In a sign that any big spending plans will be pushed off until closer to the 2019 election, former Ontario health minister Eric Hoskins, who resigned Monday from the provincial legislature, is expected to be named Tuesday to a new federal panel assigned to design a national pharmacare plan. The panel will have until 2019 to make recommendations.

Meanwhile Jane Philpott, the Minister of Indigenous Services, has promised that the budget will contain the cash needed to put the government in compliance with a 2016 ruling by the Canadian Human Rights Tribunal that said social services for children on reserves had to be funded at levels similar to those provided to other Canadian kids.

Also, members of the Green Budget Coalition, a group of 19 of Canada's top environmental organizations, have been told to expect good news in the budget. The coalition has asked for a historic expansion of Canada's protected land and marine areas to be financed with an investment of $1.4-billion over three years.

The money would go toward the development of national parks and protected areas being created by Indigenous groups, provinces, territories, municipalities and private interests.

With a report from Gloria Galloway in Ottawa