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Politics Tax changes will target ‘dead money’ and boost investment, Morneau says

Finance Minister Bill Morneau is seen in St. John's on Sept. 12, 2017.

Andrew Vaughan/THE CANADIAN PRESS

Finance Minister Bill Morneau says the federal government's proposed new tax rules will target billions in "dead money" currently parked in small businesses, encouraging owners to pump those savings into the economy.

Speaking to The Globe and Mail's editorial board Wednesday, the minister presented an entirely new argument in defence of the controversial tax package. The term "dead money" was never used when he held an extensive news conference in July to announce the changes. Consultations on the proposals officially close Monday.

Mr. Morneau said the ultimate goal of the changes is to correct a growing and unintended aspect of the tax system that fails to encourage small-business owners to reinvest their corporate savings back into their companies.

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"We're actually giving people incentive to sit the dead money on their balance sheet and invest it in something else," he said. "We've created a big, gaping hole for tax planning and at the same time a decreased likelihood that people are going to invest in their business. That's what we're getting at here."

The minister estimated that hundreds of billions of dollars currently sits in small-business corporations, with up to $30-billion added each year. If the changes encouraged even half of that annual amount to go back into direct business investment, he said that would boost economic growth by half a percentage point of GDP.

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He dismissed out-of-hand the counter-arguments that the changes will encourage that capital to leave the country, claiming that such statements amount to fear-mongering by self-interested parties.

"You need to look at the real facts as opposed to peoples' scare tactics," he said, noting that Canada's corporate tax rate is currently about 12 percentage points lower than in the United States.

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The minister's efforts to counter the criticism of his plans comes as the House of Commons finance committee hears from a wide range of expert witnesses expressing concerns with the proposals. A common theme of the concerns is that the changes are unfocused and would benefit from additional consultation to avoid unintended consequences.

The phrase "dead money" was frequently cited by former Bank of Canada governor Mark Carney in 2012 as he chided corporate Canada to get off the sidelines and start investing again following the financial crisis of 2009.

During the one-hour discussion at The Globe and Mail in Toronto, Mr. Morneau indicated the federal government has no intention of backing away from its proposals. He did say, however, that he is open to potential changes that would avoid unintended consequences. Specifically, he said the goal of the changes was never intended to negatively affect the inter-generational transfer of businesses such as family farms. He also expressed some sympathy for the concerns of some business owners who say that the current withdrawal rules for registered retirement savings plans are too restrictive, making them less appealing than saving for retirement through a corporation.

The minister also provided rough calculations aiming to show the changes will not affect most small businesses.

The federal government is proposing three main changes to tax rules governing incorporated small businesses. The first would restrict the use of "income sprinkling" to family members who do not work or invest in the business as a way of paying less tax. The second would restrict the conversion of dividend income into capital gains and the third, less developed, proposal would restrict the use of incorporated small businesses as a vehicle for making passive investments.

The government has said the income-sprinkling change would raise an estimated $250-million in additional federal revenue. Finance Canada has not released an estimate for the revenue impact of the passive investment changes, in part because several options have been proposed.

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Mr. Morneau said Wednesday that restricting passive investments would likely raise "multiples" of the $250-million raised by the income-sprinkling provisions.

In terms of impact, Mr. Morneau said that of the 1.8 million incorporated small businesses known as Canadian Controlled Private Corporations, only a small percentage would likely be affected by the passive investment changes.

He said that only about 5 per cent of Canadians earn more than $150,000, which he said is when it would make sense for an individual to make passive investments through a CCPC. A government official later said that the percentage of CCPCs that would be affected by the passive investment proposals is believed to be less than 10 per cent.

On income sprinkling, Mr. Morneau said that Canada has about 25 million tax filers and only about 50,000 use income sprinkling. Of those, many would still be allowed to sprinkle income under the proposed new rules.

"It's about one out of 500. That's the situation," he said. "It's not a huge number of people who are going to be impacted by this."

On Parliament Hill, the opposition has accused Prime Minister Justin Trudeau and Mr. Morneau – who are both among the top 1 per cent in terms of personal wealth – of targeting middle-class business owners while declining to touch other vehicles such as family trusts that could impact them personally.

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"I think people conflate issues," Mr. Morneau said when asked why the government is not proposing changes to family trusts. "In a significant number of family trusts, it's actually after-tax money that goes into those trusts."

Mr. Morneau also dismissed as "absolutely absurd" the suggestion that the changes would benefit Morneau Sheppell, a human resources firm where he previously worked as executive chairman, by encouraging small businesses to seek out private pension management services.

"I imagine that that sector of Morneau Shepell is vastly less than 1 per cent of revenue. I don't even know. It's not even a business line that was even under consideration when I was there," he said.

The Finance Minister has been on the defensive in Question Period since Parliament returned. But he took a shot at the Conservative Leader and finance critic during the editorial board meeting.

"My view of my opposition on the other side of the house is they either don't get it or they're deliberately misleading," he said. "There's only those two options and my sense is Andrew Scheer falls in the first category and Pierre Poilievre falls in the second category."

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