Both critics and supporters of the Liberal government's proposed changes to small-business tax rules agree the government needs to address concerns over how they will affect succession planning.
Concerns related to transferring a family business to the next generation emerged as a rare area of consensus as MPs on the House of Commons finance committee heard from 14 witnesses Tuesday as part of a brief three-meeting study of the government's reform package.
Farmers and other small-business owners have warned that proposed changes to the treatment of dividends and capital gains would create a tax incentive for selling the family business to outsiders rather than relatives. Accountants supported that view Tuesday.
Ron Bonnett, president of the Canadian Federation of Agriculture, said he has been told privately by the Liberal government that farmers are not the target of the changes. Nonetheless, he is calling for an explicit exemption for farmers.
"In the eight years that I have sat as CFA president, it's hard to recall an issue that has evoked so much concern from farmers across Canada," he said. Farmers can spend tens of thousands of dollars and many years to develop succession plans that may now be obsolete, he said.
University of British Columbia economist Kevin Milligan, who played a lead role in the internal federal process that developed the package, acknowledged concerns related to succession should be addressed by the government when it formally responds after the consultation period ends Monday.
"I do think these [concerns] should be taken seriously, however, I don't think we should stand frozen in inaction because of fear of some transition costs," he said. "Tax changes always require transitions. They always require some disruption."
Finance Minister Bill Morneau released a package of proposed new tax rules on July 18. The changes would restrict the ability of a business owner to "sprinkle" dividend income to family members who do not work directly for the business as a way of paying less tax. They would also prevent the conversion of dividend income into capital gains as a way of paying tax at a lower rate. A third, less developed proposal, outlines several options for restricting the use of an incorporated small business as a vehicle for making passive investments.
Several witnesses also disputed the government's claims that the changes would not be retroactive, pointing to examples where past decisions in relation to capital gains could be caught up in the proposed new rules.
Another suggestion that emerged during the hearing is the possibility of separating the treatment of incorporated professionals – such as doctors, lawyers and accountants – from rules that would apply to all incorporated small businesses.
Peter Weissman, a chartered professional accountant, said a simpler approach would be to define such professionals as "personal services" businesses, which would still allow them to incorporate but would deny them the lower small-business tax rate. Mr. Weissman noted that such tax treatment already exists for professional athletes, entertainers and more recently, information technology contractors.
"It can be targeted at the people I think the government is really trying to target, and I'm one of them. I'm throwing myself on the sword here. If you want to stop people like me from incorporating just to get the benefits of a low corporate rate, stop me from doing it," he said. "Some of my colleagues will not be happy with me saying this, but professional corporations do not need the same kind of capital retention that normal family businesses do and there are ways to address that much more simply than what has been proposed."
Several Liberal MPs stressed during the meeting that the changes are only proposals and that the government will update its plans in response to concerns.
"There's a lot of passion and emotion," said Liberal MP Raj Grewal. "This is how, in my humble opinion, democracy and policy works best: Something was proposed and now we're getting feedback from Canadians across this country on how we can change it ... You don't want any unintended consequences because people do work really hard, especially on the family farm."
The issue continued to dominate Question Period, as Conservative Leader Andrew Scheer asked Prime Minister Justin Trudeau why the proposed new rules do not apply to family trusts.
"He either does not care or he is completely oblivious to the impact of his policies, except he is quite sure that these new rules will not affect his own family fortune," Mr. Scheer said. "Why will the Prime Minister not give the same protection to middle-class Canadians that his family trust enjoys?"
"We need a system that is fair for everyone," Mr. Trudeau replied. "The current system encourages wealthy families to actually use private corporations to pay a lower tax rate than middle-class Canadians. That is not fair."