Liberals to cut-small business tax, tweak controversial proposals

TheGlobeAndMail.com
Oct. 16, 2017
Bill Curry

The Liberal government is moving ahead with a controversial package of new tax rules, offering to make a few changes while also promising to lower the small-business tax rate to 9 per cent by 2019.

Prime Minister Justin Trudeau's surprise announcement to cut the small-business tax rate won immediate praise from his increasingly restless caucus. Liberal MPs have been on the defensive in their ridings as small-business owners loudly opposed the package of changes since they were first proposed in July.

But the day left many questions unanswered as to how exactly the government intends to respond to the specific complaints that business owners and tax experts have raised at town halls across the country.

The government said on Monday that it would be revising some of its tax proposals and that details would be released over the coming days.

The announcement from the Prime Minister and Finance Minister Bill Morneau represents the government's first official policy response to the strong criticism it has faced since releasing proposed changes to small-business tax rules in July.

"When we made the commitment back in 2015 to lower small-business taxes, we were very clear about one thing: We would only make this change after we took a look at the tax system. That's what our consultations of these past months were all about," Mr. Trudeau said at an event in Stouffville, Ont.

The previous Conservative government's 2015 budget had legislated a plan to gradually reduce the small-business rate by 0.5 percentage points a year until it reached 9 per cent by 2019.

The Liberals campaigned on honouring that plan, but the 2016 Liberal budget only approved the first decrease – to 10.5 per cent from 11 per cent – and removed the automatic future decreases. The Liberals had declined to say until now whether there would be further reductions to the rate.

Mr. Trudeau said on Monday that it is important to tighten small-business tax rules to ensure individuals aren't incorporating inappropriately simply as a way of avoiding higher personal tax rates. However, tax experts have warned that the growing discrepancy between small-business tax rates and personal tax rates is one of the causes of the problem the government claims it is trying to fix, which is the spike in the number of people incorporating for tax reasons. Mr. Trudeau dismissed suggestions that the new tax cut would worsen the situation.

Conservative Leader Andrew Scheer said the Prime Minister is changing course because of the strong pushback from business owners across the country.

"It's absolutely clear that he's only doing this because of the backlash and the outrage," he said. "Without this opposition to his proposals, I don't believe that they would have done this. I believe this is a response to a political crisis."

Calgary-based accountant Kim Moody, who has followed the debate closely, said there were "substantial" details missing from Monday's announcement.

"It doesn't appear like they're budging," he said. "The devil's in the details and there are no details."

Liberal MPs were summoned to an 8 a.m. closed-door caucus meeting on Monday on Parliament Hill to receive an outline of the government's plans from Mr. Trudeau and Mr. Morneau.

Liberal MPs emerged from the hour-long meeting expressing satisfaction with how the government is responding to the controversy over its initial package of proposals.

New Brunswick MP Wayne Long, who had been among the most vocal critics of his own government, said he was happy with what he heard.

"For the first time in a long time, I've got a bit of my smile back and feel very, very good about where we're going to go as a government," Mr. Long told reporters following the caucus meeting. "I view it as a very, very positive thing."

Entrepreneurs were frustrated at the lack of specificity in Monday's announcement. "Dropping the small-business rate felt like more of a political gesture," said Christopher Neal, a Saint John accountant and entrepreneur who helped build a coalition of 140 New Brunswick businesses to lobby MPs, including Mr. Long, to fight against the measures announced this summer. "Until I can give my clients advice, until I can answer their questions about how to conduct their affairs in the face of new tax law, the government's done nothing."

Chris Gadula, chief executive of the Toronto building-measurement and data-maintenance company Space Database Inc., said he was grateful for the announced tax break, but was careful to note it had been already been promised during the election. But other than a brief mention of the lifetime capital-gains exemption, "there's no detail," he said.

The government said on Monday that it will be revising its proposals in relation to income sprinkling, which allows a small-business owner to split income among family members to reduce the family's overall tax bill.

The government is sticking with the plan to remove this benefit in cases in which family members have not made a "reasonable" contribution to the business. The outline of a new definition states that such a contribution must include either labour, capital, taking on a financial risk such as co-signing a loan or past contributions along those lines. Parts of the original proposal that would have limited access to the lifetime capital-gains exemption are being removed in response to concern that they would negatively affect the intergenerational transfer of family businesses.

Federal officials said the government will also announce revisions this week that will include guarantees that low- and middle-income Canadians will be protected from new measures that raise taxes on personal investments made through private corporations.

Briefing materials from the Department of Finance state that the vast majority of private corporations will not be affected by the changes to small-business rules. The department estimates that about 50,000 family-owned corporations – roughly 3 per cent – benefit annually from income sprinkling. About 80 per cent of these families earn more than $125,000 in total income and 50 per cent of these families earn more than $200,000 in total income.