Liberals trimming small business tax rate amid uproar over tax reform proposals

FILE: Justin Trudeau
(Photo by John McCallum/Flickr, CC BY-ND 2.0)

OTTAWA — The Trudeau government took the first of several steps Monday to stanch the bleeding from a self-inflicted political wound, resurrecting a campaign promise to cut taxes for small businesses outraged by its controversial tax-reform proposals.

Prime Minister Justin Trudeau promised to gradually trim the small-business tax rate to nine per cent by 2019, down from its current level of 10.5 per cent, and also to make further changes to the plan that triggered the angry backlash from entrepreneurs in the first place.

“This tax cut will support Canada’s small businesses so that they can keep more of their hard-earned money, money that they can invest back into their businesses, their employees and their communities,” Trudeau told a news conference in Stouffville, Ont.

The small business tax rate will fall to 10 per cent in January 2018 and again to nine per cent in 2019.

Doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers have denounced the tax proposals, contending they’d hurt the very middle class Trudeau claims to be trying to help.

Trudeau and Finance Minister Bill Morneau have said the reforms will be designed to ensure they target wealthy individuals who’ve used the incorporation of small businesses to gain what the government maintains is an unfair tax advantage.

In hope of calming critics, Trudeau also announced Monday he will abandon at least one of the tax-reform elements: changing the lifetime capital gains rule. The adjustment is intended to avoid negative impacts on the intergenerational transfer of family businesses, like farms.

On another controversial proposal, the government intends to move ahead. The change is aimed at limiting the ability of business owners to lower their personal income taxes by sprinkling their income to family members who do not contribute to their companies.

Trudeau said a simplified version of the original proposal announced in July would be introduced, effective Jan. 1, 2018, but added the adjustments would be made clear as the government moves forward.

He also said nothing Monday of any impending changes to what is perhaps the most-controversial aspect of his tax proposals and, potentially, the most lucrative for government coffers: limiting the use of private corporations to make passive investments unrelated to the company.

The government is expected to announce more changes related to its tax proposals later this week.

Morneau, who’s been tasked with the difficult job of trying to sell the government’s tax proposals to the public and even fellow Liberal MPs, joined Trudeau at Monday’s announcement.

“I spent the last few weeks travelling the country, listening to people,” he said. “We know that our current system just isn’t fair. It rewards people who are successful more than it rewards people who are working hard to be successful.

“We didn’t design the system that we inherited, but we’ve made clear that we intend to fix it. We’re going to leave a fairer system behind for the next generation.”

Trudeau campaigned in 2015 on a promise to reduce the small business tax rate to nine per cent from 11 per cent over three years.

But he announced in Budget 2016 he would freeze the rate at 10.5 per cent, cancelling in the process a legislated reduction to nine per cent instituted by the previous Conservative government.

Faced with vocal opposition to the tax proposals, the Liberal government is now reviving the nine per cent promise.

Trudeau insisted Monday the government stated it would only lower the small business tax cut after it had conducted a tax-system review, which it undertook last year.

But Conservative Leader Andrew Scheer accused Trudeau on Monday of only reinstating the small business tax cut as a way to manage the growing political crisis around the tax proposals.

“The very first thing the prime minister did, in his first budget, was to cancel that tax cut,” Scheer said in Ottawa. “Today, he would have you believe that this was the plan all along. I reject that.”

The small business tax rate applies to the first $500,000 of active corporate income.

On Monday, the Liberal government said lowering the rate will provide entrepreneurs with up to an additional $7,500 per year. Combined, Ottawa estimates the tax reductions will reduce Ottawa’s revenues by about $2.9 billion over five years.

On the tax proposals, more changes are likely on the way.

As originally proposed, the plan would restrict income sprinkling, in which an incorporated business owner can transfer income to a child or spouse who is taxed at a lower rate, regardless of whether they actually do any work for the company.

It would also limit the use of private corporations to make passive investments that are unrelated to the company and curb the ability of business owners to convert regular income of a corporation into capital gains, which are taxed at a lower rate.

The Canadian Federation of Independent Business said overall the announcement was a good thing, though there are still some concerns.

“What this decision will do is pump hundreds of millions of dollars back into the small business community and that will help entrepreneurs create more jobs and grow the economy,” said prairie CFIB spokeswoman Marilyn Braun-Pollon.

“We are worried that the income-sprinkling changes will keep the benefits of … ownership out of the hands of many spouses, who as we know participate in more informal ways in the business.”

Braun-Pollon said they will also wait to hear more on passive income rules and the treatment of capital gains related to business succession, which is of particular interest to farmers.

The Liberals’ popularity has taken a hit in some opinion polls amid the backlash to the proposed reforms, first announced in mid-July.

The damage control effort began Monday with the briefing for Liberal MPs, some of whom have been among the most critical of the proposals. Backbenchers emerged from the meeting saying they feel satisfied that the government has listened to their concerns, although they were not given details of the changes that are to be unveiled in a series of announcements later in the week.

“I feel very, very positive. For the first time in a couple months, I’ve got a bit of a smile on my face,” said New Brunswick MP Wayne Long, who was kicked off two Commons committees for voting against the government earlier this month on a Conservative motion calling for further consultations on the proposed reforms.

“There wasn’t a lot of specifics today, but I’m very, very confident — by certainly the tone and messaging of the minister — that a lot of these concerns … will be addressed.”