Morneau’s tax proposals still need work despite changes, critics insist

Morneau ditched one of the proposals last month related to converting income into capital gains.
(Photo: Bill Morneau/Facebook)

OTTAWA— A coalition of industry associations says Bill Morneau must make more changes to the controversial tax proposals he first unveiled last summer to ensure he addresses deep, persistent concerns in the small-business community.

The group, which came together in recent months as a vocal opponent of the finance minister’s tax-reform plan, is urging him to go further beyond the adjustments he made to calm an uproar that dogged him for months.

The message was delivered to Morneau on Monday as part of the coalition’s first official response since the government announced several amendments last month.

“While we thank you for making progress … we remain very concerned by the remaining proposals that appear to be moving ahead,” said a letter sent to Morneau’s office from the Coalition for Small Business Tax Fairness, which represents about 80 associations.

The changes to Morneau’s plan followed an onslaught of complaints from doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers. They denounced the proposals, contending they would hurt the very middle class the Trudeau government claimed to be trying to help.

Prime Minister Justin Trudeau and Morneau argued the reforms were designed to ensure they targeted wealthy individuals who have used the incorporation of small businesses to gain what the government maintained was an unfair tax advantage.

But following a consultation period, Morneau took steps last month to quiet the backlash by tweaking two of the three proposals and abandoning the third one altogether.

Amid the outrage, the government also announced it would resurrect a 2015 campaign promise to cut taxes for small businesses. 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.

The coalition acknowledged the progress but, after digesting and assessing the adjustments, it insisted the government has yet to go far enough.

“I’d say the level of alarm is still very high with respect to the package of changes as a whole,” said Dan Kelly, a coalition member and president of the Canadian Federation of Independent Business.

“I think that this is still very, very tender. … The business community has really only pressed pause here, it certainly hasn’t warmed up to the overall package.”

Morneau ditched one of the proposals last month related to converting income into capital gains. The change, he said at the time, came in response to concerns the measure could have negative tax implications for small businesses following a death and create challenges for owners who hoped to pass their family businesses to the next generation.

The government also announced it would move ahead with its proposal to limit the ability of owners of private corporations from unfairly lowering their personal income taxes by sprinkling their earnings to family members who do not contribute to their companies.

However, the Liberals vowed to simplify the proposal, which is set to come into effect Jan. 1, in response to concerns about its complexity. It also removed an element that would have limited access to the lifetime capital gains exemption as a way to avoid negative impacts on the intergenerational transfer of family businesses, like farms.

Morneau also scaled back what some believe is the most-contentious piece of the tax-reform plan its proposal on passive-investment income. The change, the government says, will create a threshold of $50,000 on passive income per year to ensure only three per cent of the most wealthy private corporations will have to pay higher taxes.

The coalition’s letter urges Morneau to postpone the income-sprinkling proposal until Jan. 1, 2019, provide more clarity on how it will work and, at minimum, consider making spouses exempt. Members are concerned that the change is supposed to come into effect at the beginning of January 2018, which is only weeks away, Kelly said.

He added that the coalition also wants the government to abandon the passive-income proposal.

The letter also argues that the $50,000 annual income threshold is too low and would prevent small businesses from making investments to help them grow. It also insists business owners would be stuck with added costs from the additional red tape.

The government plans to release draft legislation on the passive-income change in the lead up to next year’s budget.

Daniel Lauzon, a spokesman for Morneau, wrote in an email that the public and parliamentarians will still get an opportunity to comment on detailed proposals before they are legislated, even though the formal consultation period has ended.

He said the government has already acted on some of the recommendations.

“From the beginning we said we would listen in order to get this right,” Lauzon wrote in response to questions about the coalition’s letter.

“We are always open to input and ideas, and I think we’ve shown our willingness to listen carefully, and to act on what we hear. What we won’t do is move away from our core objective of ensuring the middle class is treated fairly.”