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Prime Minster Justin Trudeau speaks in Saskatoon on Aug. 31, 2017.

Liam Richards/THE CANADIAN PRESS

The federal government is scrambling to contain the fallout from its controversial tax reform proposal, with Finance Minister Bill Morneau scheduling a last-minute meeting with small business owners in Vancouver on Tuesday before the Liberals gather for their first caucus meeting since summer break.

Many Liberal MPs say a growing backlash against the proposed tax changes will top the agenda at this week's caucus retreat in Kelowna, B.C., but they also heard concerns this summer about asylum seekers crossing the Canada-U.S. border and the government's $10.5-million payout to Omar Khadr.

Liberal MPs say they've been inundated with calls about the proposed tax changes, and expect the federal cabinet will be open to suggestions about how to fine-tune any upcoming legislation. The government is consulting on the proposed changes until Oct. 2, but doesn't appear willing to back down on the essence of its plan.

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Read more: Concern mounts over Morneau's proposed tax changes affecting small businesses

"People are coming in in droves on that one," said Liberal MP Wayne Easter, who represents the Prince Edward Island riding of Malpeque. "We will see whether the government needs to reconsider, to reformulize, to restructure, whatever. That's what consultations are supposed to be about."

The federal government maintains its three-part proposal will close unfair tax loopholes used by wealthy small business owners and professionals to ensure that everyone is paying their fair share. Prime Minister Justin Trudeau last week said he will make "no apologies" for the government's commitment to helping the middle class by having wealthy people pay more.

But business groups are banding together to insist the changes could have devastating consequences on small business owners, many of whom make up the bulk of the so-called middle class.

While the tax changes are expected to take up the most air time at the two-day caucus retreat, MPs said they also heard throughout the summer about two other hot-button issues: the Khadr payment and asylum seekers.

Toronto MP John McKay said the Khadr settlement was one of the top issues – along with U.S President Donald Trump and the tax changes – in his riding this summer.

"The people that phoned in were a) very angry, b) saw it as an unjustified payout, and c) saw the amount as outrageous," Mr. McKay said.

Mr. McKay said when he explained to people why the government made payment to Mr. Khadr, a child soldier accused of killing a U.S. medic in Afghanistan, they were more understanding. The Supreme Court has ruled Mr. Khadr's rights as a Canadian citizen were violated while he was imprisoned at the U.S. military prison in Guantanamo Bay, and the government says it would have cost taxpayers more money had they fought the case in court.

Liberal MP Frank Baylis, who represents a suburban Montreal riding, said he also heard complaints about the Khadr settlement, and spent time explaining to his constituents why the decision was made.

"Nobody's happy about this. This isn't a win for anybody. And $10-million is a phenomenal sum of money, and I fully understand that people are upset that we have to make this payment," he said.

"I don't think our government's happy to have to do it, either."

Montreal MP Francis Scarpaleggia, the Liberal caucus chair, said so-called "headline issues" such as asylum seekers illegally crossing the border were also brought to his attention this summer.

"That's impacting in Quebec, for example, perhaps more than other parts of the country," Mr. Scarpaleggia said.

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But the most pressing issue appears to be the tax changes.

The government's proposed package of tax reforms would restrict the use of income sprinkling, a practice in which business owners with a high-income tax rate can reduce the total amount of tax their families pay by "sprinkling" income to family members in lower tax brackets. The changes would also restrict the use of private corporations as a vehicle for making passive investments, in things such as stocks or real estate, unrelated to the business; and limit a business owner's ability to convert income into capital gains – rather than as a salary – as a way of paying less tax.

Liberal MP Randeep Sarai, the B.C. caucus chair, said he's heard concerns about the possibility of retroactive taxation on passive investments, as well as a belief that small business owners take a lot of risk and require a tax benefit in order to hire more people and plan for retirement. Finance officials say none of the changes will impact existing savings.

"I anticipate [the government] probably tweaking it after listening to Canadians, and adjusting it to address some of the concerns," Mr. Sarai, the MP for Surrey Centre, said. "There is a lot of confusion."

Some MPs, however, view the changes as necessary and hope the government doesn't back down.

Winnipeg MP Robert-Falcon Ouellette said while the regulations may require some tweaking, he is on board "100 per cent" with his government's plan.

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"You can't have people sitting behind in their gated communities and saying, 'Well, you know, Let them eat cake.' "

Mr. Morneau's spokesman said Tuesday's meeting in Vancouver is a continuation of the government's consultations throughout the summer. The Finance Minister also held a conference call with worried MPs last week.

Mr. Morneau will "redouble those efforts," spokesperson Dan Lauzon said, "to ensure everyone has a clear understanding of the proposals, and to ensure a fact-based debate on what is a very important issue as we look to build an economy that works for the middle class."

Dan Kelly, president of the Canadian Federation of Independent Business, said the government's framing of the issue of closing a "loophole" has sent a negative message to business owners who feel they are being branded as tax cheats.

"They have created an absolute firestorm of anger on the part of the independent business community unlike I have seen in 25 years," Mr. Kelly said. "[Business owners] feel so, so unappreciated by their government. So there's that emotional element of this which is absolutely palpable right now."

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