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Report On Business Morneau to address potential 'unintended consequences' of small-business tax plan

Finance Minister Bill Morneau is photographed on Oct. 4, 2017.

Fred Lum/The Globe and Mail

Finance Minister Bill Morneau said he will take the time necessary to address potential "unintended consequences" of his government's proposed small-business tax changes, but he still intends to proceed with the controversial plan "as expeditiously as possible."

"We will make sure that we get it right," Mr. Morneau said at a news conference following a meeting in Toronto with leading private-sector economists. "So, to the extent that there's any issue that we need to look at carefully, we will.

"Our view is that we need to move forward with as much clarity as we can, as soon as we can, so that businesses will have certainty."

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Mr. Morneau has faced heavy criticism over the government's proposed small-business tax reforms, which target such practices as using the corporate structure for passive investments of personal savings and distributing dividends to non-employee family members in order to reduce the tax bill on personal income (known as income sprinkling). The government argues its plan will remove tax advantages for the wealthy, while encouraging more investment in small-business growth. But critics argue that the changes will hurt middle-income entrepreneurs, make it harder for them to save for their retirement and make it costly for family businesses to pass ownership down to the next generation.

While Mr. Morneau has indicated that he's willing to adjust the tax plan in order to address the biggest issues raises in recent public consultations that ended Oct. 2 – namely, intergenerational business transfers (a key concern for farm families) and retirement savings for small-business owners – he insists that the government is determined to proceed with the bulk of the plan.

"I think that we'll see different people across the country with different points of view," Mr. Morneau said. "We think that it's important to listen, in getting to the final conclusions. But we do intend on moving forward."

But The Globe and Mail reported on Wednesday that Finance Department officials said they are "struggling" to find a workable solution to the intergenerational transfer problem.

Brian Ernewein, general director of legislation in the department's tax policy branch, told the Senate national finance committee on Tuesday that the department is looking at submissions to the public consultations, in search of "inspiration."

"In the situation around intergenerational transfers … we know that we need to make sure that we don't have the unintended consequence of making that more challenging. So getting that right will be important," Mr. Morneau told reporters.

Conservative finance critic Pierre Poilievre noted that the Liberals have been accusing critics of the tax proposals of distorting the facts and providing a misleading picture of the government's plans. Now the Finance Department is turning to those same people for help in solving the intergenerational issue.

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"Morneau and [Prime Minister Justin] Trudeau attacked the tax and accounting community and now they're begging that same community to bail them out of a problem and find a solution to the crisis that the minister's proposals have created," he said.

"We're looking to make sure that we have the incentive for people to invest in their active business and don't inadvertently create a situation where people are able to leave money in their private corporation purely for tax-planning purposes. Our goal is to make sure we get this balance right," Mr. Morneau said.

Mr. Morneau's comments followed his meeting with private-sector economists on Canada's economic outlook, something finance ministers traditionally hold in advance of each budget and economic and fiscal update. Mr. Morneau said the government hasn't nailed down a date for the release of its fall update, but it should be within the next several weeks.

Bank of Montreal chief economist Douglas Porter, a participant in the closed-door meeting, said there was some concern expressed by the economists about the potential impact of the tax changes – especially at a time when the United States, Canada's biggest trading partner and cross-border competitor, is proposing to cut its own corporate tax rates.

"One widely-held concern was that Canada could step out of line with the U.S. on this. We could face a serious competitive challenge," Mr. Porter said.

In Question Period on Thursday, Mr. Poilievre and several other Conservative MPs also questioned why Mr. Morneau isn't doing more to tackle offshore tax avoidance. The MPs pointed out that Mr. Morneau's family company, the human resources firm Morneau Shepell, operates a subsidiary in Barbados.

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Mr. Morneau was not in the House of Commons on Thursday. Federal Revenue Minister Diane Lebouthillier said fighting international tax evasion and avoidance is a priority for the government.

Som Seif, CEO of Purpose Investments, says proposed changes to small business taxes would have negative consequences to the Canadian economy and that all Canadians should be paying attention
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